Opsens
Annual Report 2011

Plain-text annual report

Measure, iMprove AnnuAl RepoRt 2011 Medical oil and Gas corporate profile Opsens is a leading developer, manufacturer, supplier and installer of a wide range of fiber optic solutions based on proprietary patented technologies. Opsens provides sensors for the measurement of pressure, temperature, displacement and strain to original equipment manufacturers (OEM) and end users in the oil and gas, medical and laboratories fields. Opsens’ sensors provide long-term accuracy and reliability in the harshest environments. HiGHliGHts 2011 incoMe GrowtH $5,3 M $6,0 M $2,4 M 2010 $4,2 M 2011 $3,1 M $0,4 M 2009 Oil and Gaz Other sectors wHy invest in opsens its tarGet Markets • opsens’ products target markets with growing needs to measure pressure and temperature in hostile environments, particularly oil and gas and medical instrumentation. • opsens targets major, well-recognized companies who constantly work at improving their methods and operations. its offer • opsens’ products have proven themselves. • Acceptance of optical products is growing in each of our target markets. • opsens’ expertise in optical sensors is recognized. • opsens’ team has a strong capacity to materialize new ideas. • opsens’ products benefit from a strong gross margin, supported by recurring revenues through maintenance and replacement of sensors. its stability • through strong share ownership, executives’ interests are aligned with shareholders’ interests. • opsens’ financial position allows the Company to execute its business plan. our vision for 2012 • expand sales in each of our strategic markets. • progress toward commercialization of our medical instrumentation device in 2013. • Growth of our customer base and diversification of our applications for the opp-W oil and gas sensor. • Continue development of new products and applications for existing products in current and new markets. end of civil year 2011 • opsens granted Canadian patent for the easyWire • opsens receives ISo 13485 certification for FFR - Certification is key in the development and anticipated marketing of FFR products. • Agreement with lios to offer DtS to oil and gas market - this agreement allows opsens to offer complete SAGD well profile to optimize and improve management. July 2011 • Second commercial order for opp-W: 21 wells from major Alberta oil and gas producer - this is the second commercial opp-W order from this client. June 2011 • Major oil and gas producer orders for high-temperature wells MarcH 2011 • opsens receives lawsuit on the easyWire february 2011 • FFR: Animal study a success - the easyWire and optoWire performed exceptionally well in animal study. Both devices had good trackability (ability to advance the device through the artery to reach the lesion) and provided optimal pressure measurements. January 2011 • new client orders opp-W and DtS for multi-zone well • optoWire – opsens presents second FFR product - optoWire is a guide wire instrumented with a fiber optic pressure sensor, which is drift free and provides a high fidelity measurement of blood pressure in coronary arteries. In addition to more reliable measurement, the optoWire offers better mechanical performance in terms of trackability, torquability and support over other existing pressure guide wires. deceMber 2010 • easyWire – opsens presents first FFR product - the easyWire is a miniature catheter instrumented with a fiber optic sensor that slides onto a variety of guide wires. the easyWire provides a no-drift, highly accurate and reliable measurement of pressure in coronary arteries and gives cardiologists the freedom to use their favourite guide wire. With the easyWire, cardiologists can access lesions faster and easier than with other products on the market, simplifying the procedure. - opsens introduces its scientific advisory board for the development of its medical instrumentation products. • orders for opp-W and DtS combinations october 2010 • new client orders opp-W in Alberta septeMber 2010 • opsens selected by ptRC to design and produce well integrity assessment tool • new president to lead oil and gas operations - opsens has chosen a veteran from the oil and gas industry to lead the team and promote our solutions to the heavy oil market. www.opsen s.com the animal study conducted by Dr. olivier Bertrand, a member of our scientific advisory board supporting the development and refinement of our FFR products, showed that the easyWire and optoWire had performed exceptionally well during animal testing. the easyWire and optoWire delivered good trackability (ability to advance the device through the artery to reach all types of lesions) and provided optimal pressure measurements. these trials have demonstrated the superiority of opsens’ FFR products. During the past year, opsens moved closer to its target market by getting the required certification to manufacture medical devices. opsens obtained ISo 13485 certification, a key milestone in the development and marketing of medical products. ISo 13485 certification is an internationally recognized reference standard that incorporates the quality and safety constraints specific to medical devices, such as risk control, traceability and medical device monitoring. By obtaining ISo 13485 certification, opsens has shown its ability to develop products that are capable of meeting regulatory requirements. ISo 13485 certification is confirmation from an independent party of the quality of its processes with respect to maintaining the industry’s highest standards. outlook 2012 opsens intends to capitalize on the massive investments in Western Canada’s oil market by continuing to grow its oil and gas business, in SAGD wells, Co2 stimulated oil recovery and natural gas production. the strategy of offering a wide range of products and services in this area is essential to the development of opsens, as it promotes long-term revenue growth. the opp-W and DtS combination has already demonstrated its performance in multiple applications for SAGD environment. opsens will continue to diversify applications for its systems. the Company will remain alert to opportunities to enhance its product line through research and development. With its miniature optical sensor technology, intellectual property, team and scientific committee, opsens has all the cards to secure the necessary approvals to market a very high potential medical product in fiscal 2013. opsens intends to analyze the possibility of partnerships to secure a well-established distribution network in the interventional cardiology market. I thank our customers for the confidence they show in our products. I also thank the team for its dedication and for the quality of its work supported by our compliance with ISo 13485. As well, I thank opsens Solutions for the sustained growth in sales of our products, expert installation and high level of customer service in Western Canada. I wish to mention the commitment and contribution of our present and past directors in the development of our strategic plan. Finally, opsens is well aware that 2011 has been challenging for our shareholders. We have the greatest confidence in the potential of our Company and we intend to make the necessary efforts to get that value recognized in the financial markets. (s) Pierre Carrier president and Chief executive officer letter to sHareHolders In recent years, opsens has established the foundation needed to deliver sustainable growth and create value for its shareholders. opsens continued in this direction in 2011. opsens promotes its unique optical sensor technology in markets where measurements like pressure and temperature can provide great benefits. the Company focuses in particular, on the oil and gas and medical instrumentation markets. oil and Gas For a few years, opsens has been offering its opp-W fiber optic sensor to measure pressure and temperature at high temperature to Western Canada’s oil and gas producers using Steam Assisted Gravity Drainage (SAGD). Gradually, opsens’ opp-W sensor has gained ground. the Company received a second commercial order for its sensor and expanded its customer base. opsens’ sales for oil and gas rose 75%, for year 2011. the demand for our patented sensor is progressing and now, for many more applications. In recent months, opsens has signed a long-term agreement with lios technology to provide integrated solutions for measuring pressure and temperature in SAGD wells. With this agreement, opsens’ opp-W system will be combined to lios’ Distributed temperature Sensing (“DtS”) system in SAGD wells. the synergy of this combination has the advantage of broadening the measurement spectrum by providing a complete profile of SAGD wells to optimize and improve management. the signing of this agreement formalizes a partnership that contributed to the successful installation of several high-temperature solutions in SAGD projects in Canada. Indeed, several opp-W and DtS combinations have been installed and have shown to be effective prior to the agreement. For more than three years, our sensors have been successfully installed in SAGD producing wells. performance and reliability of the opp-W are now recognized by our customers. this is just the beginning for the opp-W. opsens’ innovative spirit for the creation and deployment of new applications is reflected in the diversification of our sensor’s uses, a promising element for revenues growth related to this product and to this segment of our business. Medical instruMentation FFR product development progressing at high speed FFR is an index of the functional severity of coronary stenoses calculated from pressure measurements taken before and after narrowing of arteries discovered during coronary angiography. FFR measurement is an increasingly popular method used in the treatment of cardiac lesions. the FAMe Study, published in 2009, outlined the positive result this cost effective procedure has on patients’ overall outcome. Despite the virtues attributed to this type of examination, cardiologists, who recognize the benefits of the procedure, show some frustration towards instruments currently available to perform FFR. that is why opsens has developed, on the basis of his miniature fiber optic sensor, two instruments perfectly suited to the measurement of FFR. the first one, the optoWire is a guide wire instrumented with a fiber optic pressure sensor which is drift-free, and provides a high-fidelity measurement of blood pressure in coronary arteries. the second one is the easyWire, a miniature catheter instrumented with a fiber optic sensor that slides over a variety of guide wires. the easyWire provides a no-drift, highly accurate and reliable measurement of pressure in coronary arteries and gives cardiologists the freedom to use their favourite guide wire by simply slipping on the catheter tip. www.ops ens.com MANAGEMENT DISCUSSION & ANALYSIS Annual report for shareholders Fiscal year ended August 31, 2011 The following comments are intended to provide a review and analysis of the operating results and financial position of Opsens Inc. as of August 31, 2011, and for the three months and year ended this date, in comparison with the corresponding periods ended August 31, 2010. They should be read and interpreted in conjunction with the audited financial statements as well as the accompanying notes as at August 31, 2011. Unless stated otherwise, the Management Discussion and Analysis has been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) on a consolidated basis. This document was prepared on November 15, 2011. All amounts are in Canadian dollars. This report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not guarantees of our future results, and actual results could differ significantly from those foreseen by such statements due to several factors, including economic conditions, capital expenditures in the measuring instrument sector, currency exchange rate variation, and our ability to manage Opsens successfully under these uncertain conditions. Consequently, the reader should not place undue reliance on these forward-looking statements. These forward-looking statements are only valid as at the date of this document. The Company is under no obligation to revise or update these forward-looking statements in order to reflect the events or circumstances that occur after the date of this analysis, except when it is required by law. CORPORATE OVERVIEW Opsens Inc. (the “Company”) is a leading developer, manufacturer, and supplier of a wide range of fiber optic sensors and associated signal conditioners based on proprietary patented and patent-pending technologies. Opsens’ sensors provide long-term accuracy and reliability in the harshest environments. Opsens provides sensors to measure pressure, temperature, strain, and displacement to original equipment manufacturers (OEM) and end-users in the oil and gas, medical, and laboratory fields. Opsens provides complete technical support, including installation, training, and after-sales service in conformity with ISO 9001:2008 and ISO 13485:2003. Opsens holds six (6) patents and has four (4) patents pending covering its products and technology provided to its markets, giving the Company freedom to operate. With its patented technologies and highly recognized expertise, Opsens meets consumers needs in the medical, oil and gas, and laboratory markets. Since December 11, 2007, activities in the oil and gas market have been performed by the wholly-owned subsidiary Opsens Solutions Inc. (“Opsens Solutions”), formerly Inflo Solutions Inc. VISION, STRATEGY, AND OUTLOOK The worldwide market for fiber optic and conventional sensors is a multi-billion dollar market. Opsens’ sales and marketing strategy aims to provide solutions for the various current niche markets and develop specific new markets. The Company’s expertise, know-how, and patented technology are the keys to new production techniques improving the reliability of measuring equipment. Also, the Opsens production technique called MEMS (Micro-Electro- Mechanical-System) encourages penetration into markets traditionally occupied by conventional sensors through higher production volumes and reduced manufacturing costs. In 2012, Opsens expects revenue from product sales to be higher than a year earlier. The enhanced development and increased market acceptance, will likely lead to increased revenues. 1 SELECTED CONSOLIDATED FINANCIAL DATA (In thousands of Canadian dollars, except for information per share) Year Ended August 31, 2011 $ Year Ended August 31, 2010 $ Year Ended August 31, 2009 $ Sales Cost of revenues Gross margin Administrative expenses Marketing expenses R&D expenses Financial income Stock option-based compensation Amortization of property, plant and equipment Amortization of intangible assets Gain on disposal Profit (Loss) before income taxes Income taxes Net Profit (Net loss) Net Profit (Net loss) per share – Basic Net Profit (Net loss) per share - Diluted 6,005 4,095 1,910 2,036 645 1,417 (89) 185 200 27 - 4,421 (2,511) - (2,511) (0.05) (0.05) 5,281 3,173 2,108 1,521 870 1,047 (41) 282 179 32 (2,375) 1,515 593 - 593 0.01 0.01 3,088 2,000 1,088 1,179 872 828 (34) 229 164 21 - 3,259 (2,171) - (2,171) (0.05) (0.05) (In thousands of Canadian dollars) As at August 31, 2011 $ As at August 31, 2010 $ As at August 31, 2009 $ Current assets Total assets Current liabilities Long-term debt Shareholders' equity 6,927 8,701 1,137 30 7,534 9,597 11,516 1,527 129 9,860 4,880 6,450 652 256 5,542 No dividend was declared per share for each share class. On June 25, 2009, the Company completed a private placement of 2,916,667 units at a price of $0.60 per unit for gross proceeds of $1,750,000. On February 12, 2010, the Company completed a private placement 4,287,500 units at a price of $0.85 per unit for gross proceeds of $3,644,375. 2 SUMMARY OF CONSOLIDATED QUARTERLY RESULTS The summary below presents the periods in which Opsens published unaudited interim financial statements. (In thousands of Canadian dollars) Three-month period ended August 31, 2011 $ Three-month period ended May 31, 2011 $ Three-month period ended February 28, 2011 $ Three-month period ended November 30, 2010 $ Revenues Net loss for the period Net loss per share - Basic Net loss per share - Diluted 1,107 (731) (0.02) (0.02) 2,415 (390) (0.01) (0.01) 1,336 (683) (0.01) (0.01) 1,147 (707) (0.01) (0.01) (In thousands of Canadian dollars) Three-month period ended August 31, 2010 $ Three-month period ended May 31, 2010 $ Three-month period ended February 28, 2010 $ Three-month period ended November 30, 2009 $ Revenues Net profit (net loss) for the period Net profit (net loss) per share – Basic Net profit (net loss) per share – Diluted 1,695 2,016 0.04 0.04 1,469 (341) (0.01) (0.01) 1,047 (586) (0.01) (0.01) 1,070 (496) (0.01) (0.01) FOURTH QUARTER 2011 The Company recorded a net loss of $731,000 or 2 cents a share in the fourth quarter compared with a net profit of $2,016,000 or 4 cents a share a year earlier. The decrease in net income, in the fourth quarter of fiscal 2011, compared with the comparative quarter is mainly due to the gain on disposal of high-power transformers activities recorded in 2010. Seasonal fluctuations and year-end adjustments had no impact on operating revenues and net loss for the fourth quarter 2011. Revenue totalled $1,107,000 for the quarter ended August 31, 2011, compared with $1,695,000 a year earlier, following a widespread decline in revenues across all sectors of the Company. In oil and gas, revenue recognition for a few orders has been postponed following some customers’ decision to delay installations until the first quarter 2012. The decrease in sales in the laboratory sector is attributed to the decrease in government spending for a number of applications of our products. Administrative expenses increased at $601,000 for the latest quarter, compared with $400,000 for the same period in 2010. During the fourth quarter of 2011, the Company recorded a bad debt expense of $100,000. In addition, wages and payroll taxes were also higher due to the enhancement of the administrative team. Marketing expenses for the quarter were slightly lower at $198,000 versus $218,000 a year earlier due to the sale of our high-power transformer business, which affected employment, levels. Research and development expenses totalled $354,000 for the quarter ended August 31, 2011, compared with $228,000 for the same period in 2010. The variation is mainly explained by the absence of IRAP grants for the development of the OptoWire and EasyWire for the measurement of FFR. 3 Historically, the Company’s revenues and net results have been little affected by seasons. Seasonal fluctuations will become more significant as the weighting of sales to the oil and gas field increases, since business activity is generally greater in the winter for this sector. PERFORMANCE INDICATORS In order to evaluate the Company’s performance and generate long-term value for its shareholders, the Company has identified the following financial and non-financial performance indicators: 1) Distribution, sales, and long-term recurring revenues; 2) Products and innovation; 3) Short-term financial performance and cash flows; 4) Strategic acquisitions and development of new projects. YEARS ENDED AUGUST 31, 2011, AND AUGUST 31, 2010 DISTRIBUTION, SALES, AND LONG-TERM RECURRING REVENUES (In thousands of dollars except for percentage data figures) Year Ended August 31, 2011 $ Year Ended August 31, 2010 $ Revenues Variation (%) Gross margin Variation (%) 6,005 5,281 13.7 % 1,910 2,108 - 9.4 % The Company reported revenue of $6,005,000 for the year ended August 31, 2011, compared with $5,281,000 a year earlier, an increase of 13.7%. The growth includes a sales increase of close to $1,800,000 in the oil & gas market. Rising income in oil and gas is due to the superior performance of our products. On the other hand, income in the laboratory sector declined following the reduction of government budgets for this sector. Some discussions at an advanced stage could bring growth back in the laboratory sector. Sales in the oil and gas sector totalled $4,206,000, compared with $2,405,000 for 2010. Management anticipates that revenues from oil and gas will continue to grow as the OPP-W sensor becomes more mature and as we expend its applications and market other products. Sales in medical instrumentation were close to $430,000 in fiscal 2011 compared with $483,000 for 2010. For the year ended August 31, 2011, a significant proportion of medical sales were made to OEM customers for pressure measurement for preclinical use. We expect sales to increase in this market in 2012 in view of the development programs of OEM customer and our more mature product line for pressure and temperature measurement. 4 (In thousands of Canadian dollars except for percentage data figures) Year ended August 31, 2011 Opsens Inc.’s reportable segment $ Year ended August 31, 2011 Opsens Solutions Inc.’s reportable segment $ Year ended August 31, 2011 Eliminations $ Year ended August 31, 2011 Consolidated financial statements $ Revenues Cost of revenues Gross margin Gross margin rate (%) 2,431 1,769 662 27 4,193 2,945 1,248 30 (619) (619) - 6,005 4,095 1,910 32 (In thousands of Canadian dollars except for percentage data figures) Year ended August 31, 2010 Opsens Inc.’s reportable segment $ Year ended August 31, 2010 Opsens Solutions Inc.’s reportable segment $ Year ended August 31, 2010 Eliminations $ Year ended August 31, 2010 Consolidated financial statements $ Revenues Cost of revenues Gross margin Gross margin rate (%) 3,343 1,651 1,692 51 2,388 1,972 416 17 (450) (450) - - 5,281 3,173 2,108 40 The gross margin rate on product sales declined in fiscal 2011 from a year earlier, mostly because of decreased margins in the Opsens Inc. business unit. This decrease is mainly due to lower high margins sales in the laboratory sector and lower sales in general. For its part, Opsens Solutions has generated a substantial margin increase versus the prior year. However, the rate remains below what is expected in the medium term, given the overhead costs to cope with the increase in expected sales in coming quarters. The Company anticipates that the rates of consolidated gross margin for Opsens Inc. will move toward the minimum target of 40% over the next few quarters, as revenue grows. As at August 31, 2011, the backlog amounted to $1,755,000 ($1,436,000 at August 31, 2010). Given that a large proportion of the Company's revenue is generated in U.S. dollars, while most costs are incurred in Canadian dollars, fluctuation in the exchange rate affects revenue. For the fiscal year ended August 31, 2011, the average exchange rate was lower than the previous year, which affected negatively sales by $96,000. Market acceptance of fiber optic sensors is increasing in the Company’s markets, leading to higher sales. That said, some sectors, such as oil and gas, are seeing additional competition. Opsens is addressing the added competition by highlighting the performance characteristics of its products compared with those of its competitors. For the periods ended August 31, 2011 and 2010, pricing fluctuations and new product launches did not have a significant impact on revenues. PRODUCTS AND INNOVATION The Company is constantly working to improve its position in terms of intellectual property and what it can offer to its customers. In fiscal 2011, the Company focused on continuous improvements to its technology in markets with the highest perceived potential payoff, particularly oil and gas and medical devices. Research and development costs were increased respectively to $1,417,000 and $1,047,000 for the years 2011 and 2010. The change in research and development expenses during the period was generated primarily by the increasing number of employees and the reduction of subsidies. 5 In 2011, Opsens Inc. unveiled its complete tool box for cardiologists to use in the measurement of Fractional Flow Reserve (“FFR”). FFR is an index of the functional severity of a coronary stenosis that is calculated from pressure measurements taken before and after a narrowing of the arteries during coronary arteriography. This increasingly used approach enables an “on the spot” diagnosis for a better assessment as to whether a stent is an appropriate intervention to improve blood circulation in the cardiovascular system. A study published in 2009 in the New England Journal of Medicine, “Fractional Flow Reserve vs. Angiography for Multivessel Evaluation”, found that a stent was not always an appropriate intervention, and that its overuse was actually doing patients more harm than good in some cases. Patients of doctors using FFR had fewer stents used and better outcomes overall, the study found. The FFR market represents a real and significant opportunity for Opsens. Opsens intends to fully exploit this opportunity by aggressive development of the EasyWire and OptoWire through the stages of animal and human testing, and then commercialization. For the year 2012, Opsens expects R&D expenses to increase by a few hundred thousands of dollars in comparison with the previous year because of work performed on the FFR opportunity. Opsens wants to proceed to commercialization of a FFR product in the year 2013 by securing an agreement with a partner who already has an established distribution network. EasyWire for the Measurement of Fractional Flow Reserve The EasyWire is a miniature catheter that slides over a vast variety of guide wires. The EasyWire provides a no-drift, highly accurate and reliable measurement of blood pressure in coronary arteries and gives cardiologists the freedom to use their favourite guide wire. With the EasyWire the cardiologist can reach the area under investigation faster and easier than with other products on the market, simplifying the procedure. Opsens obtained a Canadian patent for the EasyWire, “Eccentric Pressure Catheter with Guidewire Capability” and has filed applications in other jurisdictions for the same invention. OptoWire for the Measurement of Fractional Flow Reserve Unlike traditional guide wires, the OptoWire is a guide wire instrumented with a fiber optic pressure sensor, which is drift free and provides a high fidelity measurement of blood pressure in coronary arteries. In addition to more reliable measurement, the OptoWire offers better mechanical performance in terms of trackability, torquability and support over other existing pressure guide wires. Scientific Advisory Board To support the development and refinement of the EasyWire and OptoWire, Opsens has put together a scientific advisory board of experts in the field of FFR and clinical research, composed of Drs. Morton Kern, Olivier F. Bertrand and Michael J. Lim. These leading cardiologists are advising the Company on the development, clinical studies and commercialization of the EasyWire and OptoWire. Contingencies On March 9, 2011, Opsens stated that it would vigorously defend itself against a lawsuit filed by ACIST Medical Systems Inc., a Delaware corporation (ACIST), alleging the improper use of alleged ACIST confidential information in connection with Opsens’ EasyWire device and certain patent applications Opsens has filed, including U.S. Patent Application No. 12/725,951 and International Application No. PCT/CA2010/000396 (the “Applications”). ACIST’s lawsuit seeks unspecified monetary damages, and further seeks that Opsens assign or abandon the Applications and cease development and testing of its EasyWire device. Opsens has denied all of ACIST’s legal claims in its Answer to the lawsuit filed in the United States District Court for the District of Minnesota. Opsens maintains that ACIST’s lawsuit is entirely without merit and looks forward to proving its case in Court. 6 SHORT-TERM FINANCIAL PERFORMANCE AND CASH FLOWS Non-GAAP financial measure – EBITDA, EBITDAO and EBITDAO and gain on disposal EBITDA, EBITDA before stock-based compensation costs (EBITDAO) and EBITDAO before gain on disposal do not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Company defines the EBITDAO as the cash flows from operating activities without taking in consideration non-cash expenses and changes in non-cash operating working capital items. EBITDAO and gain on disposal provides investors and management burn rate related to operating activities of the Company. Reconciliation of EBITDAO to the Annual Results (In thousands of Canadian dollars) Year Ended August 31, 2011 $ Year Ended August 31, 2010 $ Year Ended August 31, 2009 $ Net gain (loss) for the period Financial expenses (income) Amortization of property, plant, and equipment Amortization of intangible assets EBITDA Stock-based compensation costs EBITDAO Gain on disposal (2,511) (89) 200 27 (2,373) 185 593 (41) 179 32 763 282 (2,171) (34) 164 21 (2,020) 229 (2,188) 1,045 (1,791) - (2,375) - EBITDAO and gain on disposal (2,188) (1,330) (1,791) Net gain (net loss) For the year ended August 31, 2011, the net loss totalled $2,511,000, compared with a net profit of $593,000 a year earlier. The decrease in net income for fiscal 2011 compared with the previous year mainly reflects the non-recurring gain on disposal for 2010. In addition, when ignoring the gain on disposal, the negative variation of EBITDAO is the result of increased research and development costs, increased administrative costs and decreased gross profit. Fiscal 2012 results will be strongly influenced by product sales figures. The backlog of $1,755,000 and the expansion of marketing activities within the oil and gas market following previous OPP-W installations, should contribute to an increase in the sales, to the stability of the EBITDAO. Capital management The Company uses its capital to finance marketing expenses, research and development activities, administrative charges, working capital and capital assets. Historically, the Company has financed activities through rounds of public and private financing, debt financing as well as government grants. The Company reviews net loss and EBITDAO quarterly. The Company anticipates stability of these performance indicators as the increase in gross margin and increased R&D expenses for the period ended August 31, 2011, compared with the same period in 2010. The Company believes that its current liquid assets are sufficient to finance its short-term activities. 7 The Company has an authorized line of credit for a maximum amount of $200,000, $50,000 of which is available at all times and which is not limited by margin requirements. When using the line of credit in an amount varying from $50,000 and $100,000, the available credit is limited to an amount equal to 75% of Canadian accounts receivable and 65% of foreign accounts receivable plus 50% of inventories of raw materials and finished goods. If the amount used exceeds $100,000, the credit available is limited to an amount equal to 75% of Canadian accounts receivable and 90% of ensured foreign accounts receivable plus 50% of inventories of raw materials and finished goods. Under the terms and conditions of the credit agreement, the Company is subject to certain covenants with respect to maintaining minimum financial ratios related to the maintenance of a maximum ratio of 3 to 1 for total debt to equity, and a ratio of at least than 1.5 to 1 for debt to working capital, with a minimum working capital of $200,000. The covenants were met as of August 31, 2011. At the end of fiscal year ended August 31, 2011, the Company has received approval for financial support from the Ministry of Economic Development, Innovation and Export, in the form of a repayable contribution of $413,590 for the development of a portfolio of products for FFR. Simultaneously, a loan worth $500,000 was granted to the Company to support the project. Opsens expects to receive the cash proceeds from both loans in the year 2012. INFORMATION BY REPORTABLE SEGMENTS Sector’s Information The Company’s reportable segments are strategic business units managed separately as one is focused on developing, producing, and supplying fiber optic sensors (Opsens Inc.) and the other (Opsens Solutions Inc.) is specialized in commercialization and installation of optical and conventional sensors for the oil and gas industry. Same accounting policies are used for both reportable segments. Operations are carried out in the normal course of operations and are measured at the exchange value. External sales Internal sales Amortization of property, plant and equipment Amortization of intangible assets Financial expenses Net loss before gain on disposal Gain on disposal Net earnings (loss) Acquisition of property, plant and equipment Acquisition of intangible assets Segment assets 2011 2010 Opsens Opsens Opsens Inc. Solutions Inc Total Opsens Inc. Solutions Inc Total $ 1,812,047 618,977 $ 4,193,092 $ 6,005,139 $ 2,892,819 $ 2,387,897 $ 5,280,716 - 618,977 450,211 - 450,211 148,131 51,433 199,564 151,961 26,793 178,754 24,282 2,661 26,943 30,146 (311,484 ) 222,613 (88,871 ) (45,923 ) 1,720 5,084 31,866 (40,839 ) (2,159,948 ) (351,405 ) (2,511,353 ) ) (1,317,306 ) (464,429 ) (1,781,735 - - - 2,375,107 - 2,375,107 (2,159,948 ) (351,405 ) (2,511,353 ) 1,057,801 (464,429 ) 593,372 153,401 218,085 371,486 65,023 60,366 125,389 85,724 6,137,333 21,465 2,564,032 107,189 8,701,365 29,159 8,612,521 8,084 37,243 2,903,906 11,516,427 8 Geographic segment’s information Revenue per geographic sector Canada United States Germany United Kingdom Other 2011 $ 2010 $ 4,332,673 1,020,566 - - 2,601,958 906,916 298,152 181,953 651,900 1,291,737 6,005,139 5,280,716 Revenues are attributed to the geographic sector based on the clients’ location. Capital assets, which include property, plant and equipment and intangible assets, are all located in Canada. During the year ended August 31, 2011, revenues from four clients represent individually 35.5% (Opsens Solutions Inc.’ reportable segment), 14.8% (Opsens Solutions Inc.’ reportable segment), 11.8% (Opsens Solutions Inc.’ reportable segment) and 10.0% (Opsens Inc.’ reportable segment). During the year ended August 31, 2010, revenues from two clients represent individually 28.6% (Opsens Solutions Inc.’ reportable segment) and 11.3% (Opsens Solutions Inc.’ reportable segment). Administrative expenses Administrative expenses were $2,036,000 and $1,521,000 respectively for the years ended August 31, 2011, and 2010. The increase in administrative expenses is the result of an increase in wages expenses in both operating units (Opsens Inc. and Opsens Solutions Inc.), the bad debt expense of $100,000 and legal fees related to the EasyWire lawsuit. In the coming quarters, administrative costs should be less than $600,000 per quarter in spite of the additional legal fees. Sales and marketing expenses Sales and marketing expenses were $645,000 for FY2011, compared to $870,000 a year earlier, a $224,000 reduction. Sales and marketing decreased due to the sale of our high-power transformer business, which affected employment levels. Sales and marketing expenses should remain relatively stable in 2012. Sales and marketing expenses should increase over fiscal 2012 given the increased resources allocated to sales in the Opsens Solutions business unit. Financial expenses (income) Financial income reached $89,000 for the year ended August 31, 2011 compared with financial income of $41,000 the previous year. The increase in financial income during fiscal 2011 is the direct result of increased interest income of over $160,000 generated by interest earned on the balance of sale receivable and an unfavourable change of $115,000 in the gain / loss on foreign exchange. 9 Financing activities cash flow On February 12, 2010, the Company realized a private placement of 4,287,500 units at a price of $0.85 per unit for gross proceeds of $3,644,375. Each unit is comprised of one common share and one-half common share purchase warrant of the Company. Each warrant will entitle the holder to purchase one common share of the Company at a price of $1.15 for a period of 24 months following the closing of the offering. Opsens paid to the agents a cash commission equal to $254,404 and issue broker compensation warrants entitling the agents to purchase 299,299 common shares of Opsens. The broker warrants shall be issuable at an exercise price per common share equal to the offering price for a period of 24 months from the closing of the offering. The net proceeds of the private placement will be used for marketing, general working capital purposes and potentially for acquisitions. Opsens will expand its sales and marketing activities and finalize main product development partnerships, which should provide long-term recurring revenues. Warrants exercised and expired During the year ended August 31, 2011, 204,167 warrants entitling their holders to acquire one common share of the Company at a price of $0.60 expired. During the year ended August 31, 2010, 178,889 warrants entitling their holders to acquire one common share of the Company at a price of $0.80 per share were exercised for a total amount of $143,111. The book value of the exercised warrants was transferred to share capital for an amount of $63,469. During the year ended August 31, 2010, 150,890 and 2,355,563 warrants entitling its holder to acquire one common share of the Company at a price of $0.80 and $1.10 per share respectively expired. Stock options exercised, granted and expired For the period ended August 31, 2011, the Company granted to some employees and Directors a total of 453,000 stock options with an average exercise price of $0.36, and cancelled 416,500 stock options with an exercise price of $0.68 a share. During the year ended August 31, 2010, 1,250 stock options entitling their holders to acquire one common share of the Company at a price of $0.87 per share were exercised for a total amount of $1,088. The book value of the exercised warrants was transferred to share capital for an amount of $316. For the year ended August 31, 2010, the Company granted to some employees and Directors a total of 1,359,750 stock options with an average exercise price of $0.40, and cancelled 6,000 stock options with an exercise price of $0.68 a share. On November 15, 2011, the following components of shareholders' equity are outstanding: Common shares Stock options Warrants Securities on a fully diluted basis Investing activities cash flow 47,865,983 3,877,000 2,443,049 54,186,032 Opsens purchases amounted, for each of its segmented units R&D equipment, production equipment and administrative equipment, to $371,000 for the year ended August 31, 2011. Investments have been made especially to support FFR product development and commercial production. As for intangible assets, Opsens invested $107,000 for the period ended August 31, 2011. These investments involved software and patent protection for the Company's inventions. 10 Cash and cash equivalents On August 31, 2011, the Company had cash and cash equivalents of $3,747,000, compared with $5,348,000 as of August 31, 2010. Of this amount as at August 31, 2011, $2,939,000 was invested in highly liquid, safe investments. The Company also has an available line of credit in the amount of $200,000. This line of credit incurs interest at prime +2%. The restrictive clauses of the Company’s financial institution are respected. Financial position As at August 31, 2011, Opsens had a working capital of $5,790,000, compared with a working capital of $8,069,000 on August 31, 2010. Based on the private placement completed on February 12, 2010, the use of proceeds from high- power transformers sale, the exercised warrants, its cash and cash equivalents, its working capital, and its order backlog, Opsens has the financial resources necessary to maintain short-term operations, honour its commitments, and support its anticipated growth and development activities. From a medium-term perspective, Opsens may need to raise additional financing by issuing equity securities and debt. In the long term, there is uncertainty about obtaining additional financing, given the risks and uncertainties identified in the Risks and uncertainties section. During fiscal 2012, fluctuation in cash assets will depend particularly on the rate of revenue growth. For the year 2012, the Company does not anticipate additional investment into the working capital. Commitments Leases The Company leases offices in Québec under an operating lease expiring on January 31, 2014. This agreement is renewable for an additional five-year period. Future rent, without considering the escalation clause, will amount to $354,631. Opsens Solutions Inc. rents four vehicles under operating lease expiring in September 2013, October 2013 and May 2014. Future rent payments will amount to $84,565. Future payments for the leases and other commitments, totalizing $449,696, required in each of the next five years are as follows: 2012 2013 2014 2015 2016 Licence $ 185,479 186,446 77,771 - - Under an exclusive licence with a third party, the Company is committed to provide exclusive distribution of some of its products for a defined territory. 11 Related-party transactions In the normal course of its operations, the Company has entered into transactions with related parties. These transactions have been measured at the exchange amount. Professional fees to a company Controlled by a director Fees are incurred for the Company’s FFR activities. Financial instruments Cash equivalents and temporary investments 2011 $ 50,511 50,511 2010 $ - - The Company is exposed to various types of risks in the management of its cash and cash equivalents, including those related to the use of financial instruments. To manage these risks, controls were put in place, particularly those related to investment policy. The Board of Directors approves the investment policy. The Company’s investment policy aims primarily to protect capital, while considering return on investment and income taxes. Market Risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in the parameters underlying their measurement, particularly interest rates and market prices. Interest Rate Risk Interest rate risk exists when interest rate fluctuations modify the cash flows of the Company’s investments. The Company owns investments with fixed interest rates. As of August 31, 2011, the Company was holding more than 78.4% of its cash equivalents in all time redeemable term deposit. Financial charges (income) Interest and bank charges Interest on long-term debt Loss (gain) on foreign currency translation Interest income 2011 $ 22,107 18,187 100,880 (230,045 ) (88,871 ) 2010 $ 20,033 23,457 (14,200 ) (70,129 ) (40,839 ) 12 Credit Risk The use of financial instruments can create a credit risk that is the risk of financial loss resulting from counterparty’s inability or refusal to fully discharge its contractual obligations. The Company’s credit risk management policies include the authorization to carry out investment transactions with recognized financial institutions, with credit ratings of at least A and higher, in either bonds, money market funds or guaranteed investment certificates. Consequently, the Company manages credit risk by complying with established investment policies. Concentration Risk Concentration risk exists when investments are made with multiple entities that share similar characteristics or when a large investment is made with a single entity. As of August 31, 2011, the Company was holding more than 78.4% of its cash equivalents portfolio in all-time redeemable term deposit. Operational credit risk The Company provides credit for a conventional period of 30 days to its customers in the normal course of business. Credit evaluations are performed on an ongoing basis of all its accounts receivable and an allowance for doubtful accounts is recorded when those accounts are deemed uncollectible. Two major customers represent 69.7% of the Company’s accounts receivable as at August 31, 2011 (66.1% as at August 31, 2010). As at August 31, 2011, 10.8% (23.8% as at August 31, 2010) of the accounts receivable were of more than 90 days whereas than 31, 30 days. The maximum exposure to the risk of credit for receivable corresponded to their book value. On August 31, 2011, the bad debt provision was established at $3,082 ($6,110 on August 31, 2010). those were with at August (61.5% 55.8% 2010) less of as Management considers that substantially all receivables are fully collectible as most of our customers are large corporations with good credit standing and no history of default. Interest rate and cash flow risk The Company is exposed to interest rate fluctuations on certain long-term debt that bears interest at variable rates. The Company does not actively manage this risk. Assuming the cash equivalents and long-term debt as reported on August 31, 2011 had been the same throughout the period, a hypothetical 1% interest rate increase would have had an unfavourable impact of $589 on the net loss for the year ended August 31, 2011 and $1,029 on the net profit for the year ended August 31, 2010. The net loss (net profit in 2010) would have had an equal but opposite effect for a hypothetical 1% interest rate decrease. Foreign exchange risk The Company realizes certain sales and purchases and certain supplies and professional services in US dollars. Therefore, it is exposed to foreign currency fluctuations. The Company does not actively manage this risk. For the years ended August 31, 2011 and 2010, if the Canadian dollar had strengthened 10% against the US dollar with all other variables held constant, net loss would have been $6,000 higher (net income would have been $142,000 lower in 2010). Conversely, if the Canadian dollar had weakened 10% against the US dollar with all other variables held constant, net loss would have been $6,000 lower (net income would have been $142,000 higher in 2010) for the same periods. 13 As at August 31, 2011, the risk to which the Company was exposed is established as follows: Cash (US$237,074) Accounts receivable (US$120,686) Balance of purchase price to be received (US$433,422) Accounts payable and accrued liabilities (US$49,156) Total Liquidity Risk 2011 $ 232,191 118,200 424,493 (48,217 ) 2010 $ 509,164 501,350 826,037 (93,826 ) 726,667 1,742,725 Liquidity risk represents the possibility of the Company not being able to raise the funds needed to meet financial commitments at the appropriate time and under reasonable conditions. The Company manages this risk by maintaining permanent and sufficient liquidity to meet current and future financial obligations, under both normal and exceptional circumstances. The funding strategies used to manage this risk include turning to capital markets to carry out issues of equity and debt securities. The following are the contractual maturities of the financial liabilities, principal and interest (assuming current interest rates), as at August 31, 2011: Total $ 0 to 12 months $ 1 year to 2 years to More than 2 years 5 years 5 years $ $ $ Accounts payable and accrued liabilities Long-term debt Obligation under capital lease Commitments Total Fair value 1,045,840 1,045,840 108,277 32,184 449,696 89,605 15,434 185,479 1,635,997 1,336,358 - 18,672 10,047 186,446 215,165 - - 6,703 77,771 84,474 - - - - - The fair value of accounts receivable, income tax credits receivable, balance of purchase price receivable and accounts payable and accrued liabilities approximates their carrying value due to their short-term maturities. The fair value of long-term debt is based on the discounted value of future cash flows under the current financial arrangements at the interest rate the Company expects to currently negotiate for loans with similar terms and conditions and maturity dates. The fair value of long-term debt approximates its carrying value due to the current market rates. 14 STRATEGIC ACQUISITIONS AND NEW PROJECT DEVELOPMENT In its business plan, Opsens has identified some acquisition targets for growth. In order to maximize value creation for our shareholders, and based on the opportunities, Opsens may make strategic acquisitions. Opsens remains open to any business opportunities that could occur at any time. On August 16, 2010, Opsens reached an agreement to license through an Intellectual Property and Assignment Agreement (“the Agreement”) its technology in the high-power transformers business to a subsidiary of LumaSense Technologies Inc., of Santa Clara, California, representing Opsens’ exit from that line of business. The Agreement gives LumaSense exclusive rights to use Opsens’ technology in the transformer business. LumaSense will also have access to Opsens’ existing distribution channels for its transformer business. LumaSense has paid Opsens US$2.2 million in cash upon closing and will pay a further US$500,000 in one year and US$500,000 two years after closing. The Agreement was recorded as a disposal. Gain on disposal calculation had been calculated as following: Proceeds Cash received at closing Balance of purchase price to be received as of August 16, 2011 (nominal value of 500,000 $US)** Balance of purchase price to be received as of August 16, 2012 (nominal value of 500,000 $US) Disposal expenses Inventory and purchases credit Other expenses and accrued expenses Deferred revenues – manufacturing agreement* Gain on disposal Amount $ 2,190,720 443,360 376,856 3,010,936 150,000 265,829 220,000 635,829 2,375,107 * Opsens engaged in a manufacturing agreement with terms and conditions that are beneficial to LumaSense. ** Amount received as at August 31, 2011. CAPACITY TO PRODUCE RESULTS As discussed in the section regarding financial position, the Company has the required financial resources for its short-term operations, to fulfill its commitments, to support its growth plan and for the development of its activities. In a mid-term perspective, it is possible that additional financing, through the issuance of shares or through debt financing, might be required. During the next year, the generalized growth in sales should not require an additional investment in working capital. Investments in capital of a few hundreds of thousands of dollars will be needed to respond to Opsens’ operational needs. 15 From the point of view of human resources, the main corporate executive positions are filed within the Company. However, additional production personnel will be required in Quebec and Alberta. Taking into account the employment market in Canada, Opsens is confident in its capacity to recruit qualified human resources in a timely fashion. Regarding the strategy on corporate executive remuneration, it is oriented towards creation of long-term value for the shareholders. Several corporate executives hold an important share and share-purchase option position, with rights to be acquired over a four-year period in order to align shareholders’ interest with corporate executives’ interest. This long-term vision stimulates innovation and the development of recurrent revenues. CHANGES IN ACCOUNTING POLICIES Changes applied for the exercise ended August 31, 2010 On September 1, 2009, the Company adopted the new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): Section 3064, “Goodwill and intangible assets,” replacing Section 3062, “Goodwill and other intangible assets” and Section 3450, “Research and development costs.” It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit- oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company adoption of this new Section did not have a material impact on its consolidated financial statements. International Financial Reporting Standards The Accounting Standards Board (“AcSB”) of Canada has announced that accounting standards in Canada, as used by public companies, will converge to International Financial Reporting Standards (“IFRS”) over a transition period that is expected to be complete by January 1, 2011. On February 13, 2008, the AcSB confirmed 2011 as the official changeover date from current Canadian generally accepted accounting principles (“GAAP”) to IFRS. The changeover date applies to the annual and interim financial statements beginning on or after January 1, 2011. The Company will convert to these new standards according to the timetable set with these new rules. The Company will be required to use International Financial Reporting Standards (IFRS) for its interim and annual financial statements beginning on September 1, 2011 and to provide a restated comparative statement in accordance with IFRS. To prepare for the adoption of IFRS, the Company has developed an IFRS conversion plan. The Company completed the diagnostic phase in 2010, which involved a high-level review of the differences between current Canadian GAAP and IFRS, as well as a review of the alternatives available on adoption. Phase 2 of the plan, which was completed by the end of 2011, allowed the Company to evaluate the detailed consequences of the transition and helped the Company to implement the required changes to its information systems and internal control mechanisms. In fact, no major changes were required to the Company’s information systems and internal control mechanisms. The last phase, which consists of preparing the opening balance sheet, the financial results (current and comparative), reconciliation notes as well as additional notes under IFRS, started at the end the last quarter of 2011 and will be completed during the first quarter of 2012. 16 The following table presents certain choices made by management pertaining to the Standard IFRS 1 (First-time adoption of IFRS). Standards Topic International standards IFRS 1 First-time Adoption of IFRS Deemed cost of property, plant and equipment Stock option costs Designation of financial instruments An entity may elect to measure an item of property, plant and equipment at the date of transition to IFRS at its fair value and use that fair value as its deemed cost at that date. A first-time adopter is encouraged, but not required, to apply IFRS 2 to equity instruments that were granted after November 7, 2002 and that vested before the date of transition to IFRS. Possibility of redesignating financial instruments on the transition date Business combinations Costs incurred to effect a business combination are expensed in the period incurred. Management’s comments Given the type of capital assets held, management plans to account for them as at the transition date at their depreciated cost in accordance with IFRS rather than at their fair value on this date. Management intends to make this choice in order to avoid revising calculations of equity instruments on which the rights were vested before September 1, 2010. Management reviewed the classification of its financial instruments and decided to maintain its prior designation after the transition. The Corporation plans to elect not to retrospectively apply IFRS 3 to business combinations that occurred prior to its transition date and such business combinations will not be restated. The following are some of our key changes in accounting policies and their impacts with respect to the recognition and measurement of certain balance sheet and income statement items. Unless otherwise indicated, all changes in accounting policy will be applied retrospectively and the cumulative significant impact will affect opening balance of deficit as of September 1, 2010. 17 Standards International standards Management’s comments IFRS 2 Share-based Payment Entities must estimate at the end of each period the number of equity instruments expected to vest and revise that estimate, if necessary. IAS 16 Property, Plant and Equipment Following initial recognition, property, plant and equipment may be carried at their depreciated cost or their fair value in accordance with the accounting policy adopted by management. Parts of an item must be depreciated separately, each over the length of its useful life. IAS 36 Impairment of assets IAS 36 requires that an entity assess at each reporting date whether there is any indication that an asset may be impaired, and if any such indication exists, that the entity estimate the recoverable amount of the asset. Under IAS 36, an impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is defined as the higher of its fair value less costs to sell and its value in use. Historical information by employee class was collected to support estimates of future vesting and integrated in our calculations. At the date of transition, Opsens determined that financial impact. A retrospective application has been made and the opening balance of Deficit as of September 1, 2010 has been adjusted. As a result, the balance of deficit has been decreased of $214,071. Given the nature of the capital assets, management plans to use the depreciated cost model. Management does not believe that presentation at fair value has significant benefits, given the difficulties associated with determining fair value and managing fair value in accounting systems Management performed an analysis of the Company’s property, plant and equipment and none of the assets is considered to have significant parts with a specific useful life. Also, the Company is presently reviewing its depreciation methods for its assets and their estimated useful lives. Determination of the financial impact of these changes is in progress. The level of impairment consideration has been identified at the asset and cash generating unit level. To date there are no impairment indicators realized in the Corporation’s cash generating units. 18 Reconciliation of Equity as of September 1st, 2010 Share capital Stock options Warrants Contributed surplus Deficit Canadian GAAP Balance August 31, 2010 Audited $ 15,201,618 1,065,677 861,782 1,328,600 (8,597,742 ) 9,859,935 IFRS Reclassification IFRS Adjustments IFRS Balance September 1, 2010 $ - - 1,328,600 (1,328,600 ) - - - $ $ - 15,201,618 ii) (214,071) - - i) (126,737 ) 851,606 2,190,382 - ii) 214,071 (8,510,408 ) (126,737 ) 9,733,198 The contributed surplus has been reclassified according to the nature of the different elements of which it consists. An amount of $1,328,600 was recorded in the contributed surplus under Canadian GAAP following the expiry of warrants. This amount has been reclassified in accordance with IFRS requirements. i) The adjustment results from a change in accounting policies for property, plant and equipment. The Company has decided to change its current diminishing balance method for tangible assets for the straight-line method. A retrospective application has been made and the opening balance of Deficit as of September 1, 2010 has been adjusted. As a result, the balance of property, plant and equipment has been reduced by $126,737. ii) The adjustment results from stock options costs. A retrospective application has been made and the opening balance of Deficit as of September 1, 2010 has been adjusted. As a result, the balance of deficit has been decreased by $214,071. ACCOUNTING POLICIES The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) and include the following policies: Principles of consolidation The consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiary Opsens Solutions Inc. since its acquisition. Cash and cash equivalents Cash and cash equivalents include cash and short-term investments redeemable anytime or with a maturity of three months or less beginning on the acquisition date. 19 Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the moving average method. Property, plant and equipment and intangible assets Property, plant and equipment and intangible assets with finite lives are recorded at their acquisition cost. Amortization is provided using the declining balance method based on their useful lives, except for patents, which are amortized using the straight-line method, at the following annual rates: Property, plant and equipment and intangible assets Office furniture and equipment Production equipment Automotive equipment Research and development equipment Research and development computer equipment Computer equipment Leasehold improvements Intangible assets with limited lives Patents Software Intangible assets with indefinite lives 20% 20% 30% 20% 30% 30% Lease Term Term of underlying patent, 5 to 20 years 30% Intangible assets with indefinite lives are recorded at cost and are tested for impairment annually or more frequently if events of changes in circumstances indicate a potential impairment in value. The excess of the carrying value over the fair value is recorded in loss. Impairment of long-lived assets Long-lived assets held are reviewed annually or more frequently when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value. Government assistance and income tax credits for research and development Government grants are recorded when there is reasonable assurance that the Company has complied with and will continue to comply with all the conditions of the grant. Non-repayable grants or contributions related to operating expenses are included in the statement of loss when the related expenses are incurred. Grants related to capital expenditures are netted against the related assets when acquired. The Company is also eligible for income tax credits for scientific research and experimental development (SR&ED) awarded by the federal and provincial governments. The portion of SR&ED credits immediately receivable is accounted for in the year during which the related costs or capital expenses are incurred. The portion of SR&ED credits not immediately receivable is accounted for in the year during which these costs or expenses are incurred, provided the Company has reasonable assurance that these credits will be recovered. Income tax credits are applied against expenses or related assets. Recorded income tax credits are based on management’s estimates of amounts expected to be recovered and are subject to an audit by the taxation authorities. 20 Earnings (Loss) per share Earnings (Loss) per share is determined using the weighted average number of outstanding shares during the period. The Company uses the treasury stock method to calculate the diluting effect of share purchase options and warrants. Reconciliations of the numerators and the denominators used in the calculation of the basic and diluted earnings (loss) are disclosed in accordance with the GAAP. Stock-based compensation and other stock-based payments The Company uses the fair value method to assess the fair value of stock options or warrants as at their date of allocation. The fair value is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with an offset to the corresponding shareholder’s equity account. When stock options or warrants are exercised, the corresponding account and the proceeds received by the Company are credited to share capital. Income taxes The Company accounts for income taxes using the tax liability method. Under this method, future income tax assets and liabilities are recognized for deductible or taxable temporary differences between the carrying value and the tax value of the assets and liabilities based on the enacted or substantially enacted tax rates expected to apply to the year in which the differences are expected to reverse. The Company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all the future income tax assets will not be realized. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date while non-monetary items are translated at the historical rate. Revenues and expenses denominated in foreign currencies are recorded at the average rate of exchange prevailing during the period, except for depreciation and amortization, which is translated at the historical rate. Foreign exchange gains or losses are included in expenses for the year. Goodwill Goodwill representing the excess of purchase price over fair value of the net identifiable assets of acquired businesses is tested for impairment annually or more frequently when an event or circumstance occurs that indicates that goodwill might be impaired. When the carrying amount exceeds the fair value, an impairment loss is recognized in the statement of earnings in an amount equal to the excess. Revenue recognition and work in progress Opsens Inc. reportable segment revenues related to the sale of products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Opsens Solutions Inc. reportable segment revenues related to the sale or products and sensor installation services are recognized when persuasive evidence of an arrangement exists, onsite installation has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. For contract revenues earned over a long period, revenues are recorded using the percentage of completion method. Therefore, these revenues are recognized proportionately with the degree of completion of the work. The Company uses the efforts expended method to calculate the degree of completion of work based on the number of hours incurred as at the balance sheet date 21 compared to the estimated total number of hours. Work in progress is valued by taking into consideration the number of hours worked but not yet invoiced and the payments received. Losses are recorded as soon as they become apparent. Financial instruments Cash and cash equivalents are classified as financial instruments “held for trading.” As such, these financial instruments are recorded at their fair values. Changes in the fair value of held for trading instruments are recorded as investment income and disclosed as financial expenses in the income statement. Accounts receivable, balance of purchase price and income tax credits receivable are classified as loans and receivables. They are recorded at cost, which at initial recognition corresponds to fair value. Subsequent revaluations of accounts receivable are recorded at amortized cost, which generally corresponds to the initially recognized amount less any allowance for doubtful accounts. The Company has chosen to classify its financial liabilities (accounts payable, accrued liabilities, and long term debt) as other liabilities. Financial liabilities are initially measured at cost, and subsequent revaluations are recorded at amortized cost using the effective interest rate method. Transaction fees related to “other liabilities” are capitalized and presented against long-term debt. They are amortized using the effective interest rate and are recorded in the income statement. Use of estimates The presentation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The main accounting estimates relate to the income tax credit receivable, the provision for warranty and the assumptions used in the determination of the fair value of the stock options and warrants. Actual results could differ from those estimates. RISK FACTORS AND UNCERTAINTIES Opsens operates in an industry that is subject to various risks and uncertainties. The Company’s business, financial position, and operating results could be impacted negatively by these risks and uncertainties. The risks and uncertainties listed below are not the only risks and uncertainties that could impact the Company. Capital requirements Additional financing may be required for operating and investment activities. There is no guarantee that additional capital would be available at conditions that would be acceptable for Opsens and favourable for its growth. Revenues Opsens draws most of its revenue from the sale of readout devices and fiber optic sensors. The Company feels that the revenue from these products will continue to represent a significant share of Opsens’ revenue for the foreseeable future. Consequently, Opsens is particularly vulnerable to fluctuations in the demand for its products. Therefore, if demand for Opsens’ products decreases significantly, the Company and the operating results could be unfavourably affected. 22 Labour and key personnel Opsens depends on the services of its engineers, technical employees, and key management personnel. The loss of one of these people could have a significant unfavourable impact on the Company, its operating results, and its financial position. The success of Opsens is largely dependent upon its ability to identify, hire, train, motivate, and retain highly skilled management employees, engineers, technical employees, and sales and marketing personnel. Competition for its employees can be intense, and Opsens cannot ensure that it will be able to bring in and retain highly skilled technical and management personnel in the future. Its ability to bring in and retain management and technical personnel and the necessary sales and marketing employees could have an unfavourable impact on its growth and future profitability. Opsens may be obligated to increase the compensation paid to current or new employees, which could substantially increase operating expenses. Growth management and market development There is no guarantee that Opsens can develop its market significantly, thus affecting its profitability. Opsens’ expected rapid growth might create significant pressure on management, operations, and technical resources. Opsens foresees increased operating and personnel expenses in the future. In order to manage its growth, Opsens may need to increase the size of its technical and operational staff and manage its personnel while maintaining many effective relationships with third parties. There is no guarantee that Opsens will be able to manage its business growth. Opsens’ inability to establish consistent management systems, add economic resources, or manage its expansion adequately would have a significant, unforeseeable effect on its activities and operating results. Pricing policies The competitive market in which Opsens operates could force it to reduce its prices. If its competitors offer large discounts on certain products and services in order to gain market shares or sell products and services, Opsens may need to lower its prices and offer other favourable terms in order to compete successfully. Such changes could reduce profit margins and have an unfavourable impact on its operating results. Some of Opsens’ competitors could offer products and services that compete with theirs for promotional purposes or as part of a long-term pricing strategy or offer price guarantees or product implementation. With time, these practices could limit the prices Opsens may charge for its products and services. If Opsens cannot offset these price reductions with a corresponding increase in sales or decreased expenses, the decreased revenues from products and services could unfavourably affect its profit margins and operating results. Product failures and mistakes Opsens products are complex and therefore may contain failures and mistakes that could be detected at any time in a product’s life cycle. Failures and mistakes in its products could have a significant unfavourable impact on its reputation, open it up to significant costs, delay product launch dates, and harm its ability to sell its products in the future. The costs of correcting a failure or mistake in one of these products could be significant and could negatively affect its operating margins. Although Opsens expects to continue to test products to detect failures and mistakes and to work with its customers through its support and maintenance services in order to find and correct failures and mistakes, they could appear in its products in the future. Warranties, recalls, and legal proceedings Opsens is exposed to warranty expenses, product recalls, and other claims, particularly if the products prove to be defective, which would harm business development and the Company’s reputation. Intellectual property and exclusive rights In order to protect its intellectual property rights, Opsens relies on a combination of laws related to patents and trademarks, trade secrets, confidentiality procedures, and contractual provisions. Despite Opsens’ best efforts to protect its intellectual property rights, unauthorized individuals may attempt to copy certain aspects of Opsens products or obtain information that Opsens considers to be its property. The monitoring of the unauthorized use of exclusive technologies, if applicable, may prove difficult, time consuming, and expensive. In addition, the laws of 23 certain countries in which Opsens’ products will be sold do not protect products and their related intellectual property rights in the same way the laws of Canada and the United States would. There is no certainty that Opsens will successfully protect its intellectual property rights, which could unfavourably affect it. Patents applications, claims, PCTs, and Continuations in Part files by Opsens could be incomplete, invalid, circumvented, or deemed not applicable. Legal proceedings could prove necessary to carry out patent applications, claims, PCTs, and Continuations in Part. These cases could lead to considerable expenses without any guarantee of success. Intellectual property rights could be disputed as they are in the ongoing dispute over the EasyWire. Despite Opsens’ best efforts to ensure its right to market its products on its target markets, competitor patents could impede the sale potential of certain products. Competition and technological obsolescence Competitors and new companies could launch new products. In order to remain on the cutting edge of technology, Opsens may need to launch a new generation of fiber optic sensors and develop its related products and services. Whether it is competition from development companies and/or marketing of fiber optic sensors or a merger or acquisition of existing companies, competition within certain fiber optic sensor industry sectors offering solutions similar to what Opsens offers is vigorous and could increase. Some of Opsens’ competitors have significantly greater financial, technical, distribution, and marketing resources than Opsens. Technological progress and product development could make Opsens products obsolete or reduce their value. Currency exchange rate Since Opsens makes significant sales in U.S. dollars, while a large part of its operating expenses are incurred in Canadian dollars, exchange rate fluctuations between the two currencies may have an unfavourable impact on its activities, financial position, and operating results. Based on outlooks and expected penetration in the oil and gas market, the weighting of Canadian sales should increase during the coming fiscal years and, consequently, reduce Opsens’ currency exchange risk. Restrictive clauses The Company has restrictive clauses regarding indebtedness and working capital in the agreement with its financial institution. If these restrictive clauses are not respected, Opsens may need to allocate a portion of its working capital to repaying the LFPEC loan, valued at $7,937 as at August 31, 2011. OTHER INFORMATION Updated information on the Company can be found on the SEDAR Web site at http://www.sedar.com. On behalf of management, Chief Financial Officer and Secretary (s) Louis Laflamme _______________ November 15, 2011 24 Samson Bélair/Deloitte & Touche s.e.n.c.r.l. 925, Grande Allée Ouest Bureau 400 Québec QC G1S 4Z4 Canada Tél.: 418-624-3333 Télec. : 418-624-0414 www.deloitte.ca Independent auditor’s report To the Shareholders of Opsens Inc. We have audited the accompanying consolidated financial statements of Opsens Inc., which comprise the consolidated balance sheets as at August 31, 2011 and 2010, and the consolidated statements of earnings (loss) and comprehensive earnings (loss), shareholders’ equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Independant auditor’s report Opsens inc. Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Opsens Inc. as at August 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. 1 November 14, 2011 ____________________ 1 Chartered accountant auditor permit No. 11848 Opsens Inc. Consolidated statements of earnings (loss) and comprehensive earnings (loss) Years ended August 31, 2011 and 2010 Revenues Sales Cost of sales Gross margin Expenses (revenues) Administrative Marketing Research and development Stock option-based compensation (Note 15b) Amortization of property, plant and equipment Amortization of intangible assets Financial income (Note 4) Gain on disposal (Note 6) 2011 $ 2010 $ 6,005,139 5,280,716 4,094,791 3,172,311 1,910,348 2,108,405 2,036,263 645,564 1,417,037 185,201 199,564 26,943 (88,871 ) 1,521,224 870,157 1,046,921 282,057 178,754 31,866 (40,839) - (2,375,107) 4,421,701 1,515,033 Earnings (loss) before income taxes Net earnings (loss) and comprehensive earnings (loss) (2,511,353 ) (2,511,353 ) 593,372 593,372 Net earnings (loss) per share (Note 16) Basic Diluted (0.05 ) (0.05 ) 0.01 0.01 The accompanying notes are an integral part of the consolidated financial statements. Additional information on the statements of earnings (loss) and comprehensive earnings (loss) is presented in Note 25. $ l a t o T t i c i f e D l s u p r u s s n o i t p o s t n a r r a W s e r a h s l a t o T s n o i t p o d e t u b i r t n o C k c o t S n o m m o C k c o S t 1 1 0 2 s t n a r r a W s e r a h s n o m m o C $ $ $ $ $ ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( 5 3 9 , 9 5 8 , 9 ) 2 4 7 , 7 9 5 , 8 ( 0 0 6 , 8 2 3 , 1 7 7 6 , 5 6 0 , 1 2 8 7 , 1 6 8 , 8 1 6 1 0 2 5 1 , , 9 9 6 3 5 6 4 5 , , 0 0 5 0 4 1 4 , , 6 1 2 7 4 6 , 2 3 8 9 , 5 6 8 , 7 4 - - - 1 0 2 , 5 8 1 - - - - ) 3 5 3 , 1 1 5 , 2 ( ) 3 5 3 , 1 1 5 , 2 ( - - 6 2 1 , 1 4 1 ) 6 2 1 , 1 4 1 ( - - 5 5 0 , 9 5 - ) 5 5 0 , 9 5 ( - - 1 0 2 , 5 8 1 - - - - - - - - 0 0 0 3 5 4 , 0 0 0 3 5 4 , ) 0 0 5 6 1 4 ( , ) 0 0 5 6 1 4 ( , - - ) 7 6 1 4 0 2 ( , - - - - - ) 7 6 1 4 0 2 ( , - - - - - - - 3 8 7 , 3 3 5 , 7 ) 5 9 0 , 9 0 1 , 1 1 ( 1 8 7 , 8 2 5 , 1 2 5 7 , 9 0 1 , 1 7 2 7 , 2 0 8 , 8 1 6 1 0 2 5 1 , , 2 3 0 6 8 4 4 5 , , 0 0 0 7 7 1 4 , , 9 4 0 3 4 4 , 2 3 8 9 , 5 6 8 , 7 4 . s t n e m e a t s t l i a c n a n i f d e a d t i l o s n o c e h t f o t r a p l a r g e t n i n o i t a s n e p m o c d e s a b - k c o t S d e r i p x e s t n a r r a W 1 1 0 2 , 1 3 t s u g u A t a s a e c n a a B l s s o l t e N n a e r a s e t o n g n y n a p m o c c a e h T i 0 1 0 2 , 1 3 t s u g u A t a s a e c n a a B l d e t n a r g s n o i t p O d e l l e c n a c s n o i t p O y t i u q e ’ s r e d l o h e r a h s f o s t n e m e t a t s d e t a d i l o s n o C 1 1 0 2 , 1 3 t s u g u A d e d n e r a e Y . c n I s n e s p O $ l a t o T t i c i f e D l s u p r u s s n o i t p o s t n a r r a W s e r a h s l t a o T s n o i t p o d e t u b i r t n o C k c o t S n o m m o C k c o S t 0 1 0 2 s t n a r r a W s e r a h s n o m m o C $ $ $ $ $ ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( ) r e b m u n ( y t i u q e ’ s r e d l o h e r a h s f o s t n e m e t a t s d e t a d i l o s n o C 0 1 0 2 , 1 3 t s u g u A d e d n e r a e Y . c n I s n e s p O 3 1 6 , 1 4 5 , 5 ) 6 0 7 , 8 2 7 , 8 ( 7 4 0 , 5 9 5 6 3 9 , 3 8 7 7 7 0 , 6 5 8 , 9 5 2 5 3 0 2 1 , , 3 5 8 5 7 0 9 4 , 5 7 3 , 4 4 6 , 3 7 2 7 , 6 1 1 1 1 1 , 3 4 1 - 8 8 0 , 1 - - - - - - - - - ) 8 0 4 , 2 6 4 ( ) 8 0 4 , 2 6 4 ( 7 5 0 , 2 8 2 - 2 7 3 , 3 9 5 2 7 3 , 3 9 5 - - - 3 5 5 , 3 3 7 - - - - 0 0 0 , 6 8 6 , 5 7 3 8 5 9 2 , , 0 5 2 1 3 4 6 , ) 9 6 4 , 3 6 ( 0 8 5 6 0 2 , - 7 2 7 , 6 1 1 - 9 9 2 9 9 2 , ) 3 5 5 , 3 3 7 ( - , ) 3 5 4 6 0 5 2 ( , - - - - , 0 0 0 8 8 7 2 , - - - - - - ) 6 1 3 ( - - - 7 5 0 , 2 8 2 - - - - - - - 4 0 4 1 , - ) 0 5 2 1 ( , - - - - - ) 0 0 0 6 ( , ) 0 0 0 6 ( , - - - - - - , 0 5 7 9 5 3 1 , , 0 5 7 9 5 3 1 , 5 3 9 , 9 5 8 , 9 ) 2 4 7 , 7 9 5 , 8 ( 0 0 6 , 8 2 3 , 1 7 7 6 , 5 6 0 , 1 2 8 7 , 1 6 8 , 8 1 6 1 0 2 5 1 , , 9 9 6 3 5 6 4 5 , , 0 0 5 0 4 1 4 , . s t n e m e a t s t l i a c n a n i f , 9 0 5 9 8 8 , 2 4 4 3 , 8 9 3 , 3 4 , 0 5 7 3 4 1 , 2 0 0 5 , 7 8 2 , 4 9 9 2 9 9 2 , - , ) 3 5 4 6 0 5 , 2 ( - ) 9 8 8 8 7 1 ( , 9 8 8 , 8 7 1 - - - - - - 0 5 2 , 1 - - - - - , 6 1 2 7 4 6 , 2 3 8 9 , 5 6 8 , 7 4 d e a d t i l o s n o c e h t f o t r a p l a r g e t n i – e c n a u s s i t n a r r a w d n a e r a h S 9 0 0 2 , 1 3 t s u g u A t a s a e c n a a B l t n e m e c a p e a v i r t l P – s r e k o r b o t e c n a u s s i t n a r r a W e t a v i r P – s e s n e p x e e c n a u s s I t n e m e c a p l s t n a r r a W – e c n a u s s i e r a h S d e r i p x e s t n a r r a W i d e s c r e x e s n o i t p o k c o t S – e c n a u s s i e r a h S y t i u q e n o s e s n e p x e e c n a u s s I s t n e n o p m o c n o i t a s n e p m o c d e s a b - k c o t S 0 1 0 2 , 1 3 t s u g u A t a s a e c n a a B l i s g n n r a e t e N i n a e r a s e t o n g n y n a p m o c c a e h T d e t n a r g s n o i t p O i d e s c r e x e d e l l e c n a c s n o i t p O Opsens Inc. Consolidated balance sheets August 31, 2011 and 2010 Assets Current Cash and cash equivalents Accounts receivable (Note 7) Income tax credits receivable (Note 22) Work in progress Inventories (Note 8) Prepaid expenses Balance of purchase price to be received – short-term (Note 11) Balance of purchase price to be received – long-term (Note 11) Property, plant and equipment (Note 9) Intangible assets (Note 10) Goodwill Liabilities Current Accounts payable and accrued liabilities (Note 13) Current portion of long-term debt (Note 14) Long-term debt (Note 14) Shareholders’ equity Share capital (Note 15a) Stock options (Note 15b) Warrants (Note 15c) Contributed surplus Deficit The accompanying notes are an integral part of the consolidated financial statements. References: Commitments (Note 18) Contractual guarantees (Note 19) Approved by the board Signed [Denis M. Sirois] director Signed [Pierre Carrier] director 2011 $ 2010 $ 3,747,320 585,174 269,147 - 1,770,609 130,644 424,494 6,927,388 - 841,981 255,422 676,574 8,701,365 5,347,801 2,055,923 152,080 40,000 1,428,439 144,338 428,024 9,596,605 398,013 670,059 175,176 676,574 11,516,427 1,045,840 91,355 1,137,195 1,402,249 125,001 1,527,250 30,387 1,167,582 129,242 1,656,492 15,201,618 1,109,752 802,727 1,528,781 (11,109,095 ) 7,533,783 8,701,365 15,201,618 1,065,677 861,782 1,328,600 (8,597,742) 9,859,935 11,516,427 Opsens Inc. Consolidated statements of cash flows Years ended August 31, 2011 and 2010 Operating activities Net earnings (loss) Adjustments for: Amortization of property, plant and equipment Amortization of intangible assets Premium payable to Canada Economic Development Stock option-based compensation Gain on disposal Implicit interest on balance of purchase price to be received Changes in non-cash operating working capital items (Note 17) Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Proceeds of assets disposal Financing activities Reimbursement of long-term debt Issuance of equity components Issuance of equity component expenses Increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning Cash and cash equivalents at end The accompanying notes are an integral part of the consolidated financial statements. Additional information on consolidated statements of cash flows is presented in Note 17. 2011 $ 2010 $ (2,511,353 ) 593,372 199,564 26,943 13,404 185,201 178,754 31,866 19,260 282,057 - (2,375,107) (75,607 ) (5,821) (2,161,848 ) (1,275,619) 708,797 (1,579,750) (1,453,051 ) (2,855,369) (371,486 ) (107,189 ) (125,389) (37,243) 477,150 2,190,720 (1,525 ) 2,028,088 (145,905 ) (154,896) - - 3,788,574 (345,681) (145,905 ) 3,287,997 (1,600,481 ) 2,460,716 5,347,801 2,887,085 3,747,320 5,347,801 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 1. Description of business Opsens inc. (the “Company”) is incorporated under Business Corporation Act (Quebec). The Company specializes in developing and manufacturing technical and scientific instruments. 2. Changes in accounting policies Changes applied for the exercise ended August 31, 2010 On September 1, 2009, the Company adopted the new accounting standards issued by the Canadian Institute of Chartered Accountants (CICA): Section 3064, “Goodwill and intangible assets,” replacing Section 3062, “Goodwill and other intangible assets” and Section 3450, “Research and development costs.” It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company adoption of this new Section did not have a material impact on its consolidated financial statements. International Financial Reporting Standards In 2008, the Accounting Standards Board (AcSB) published an exposure draft and confirmed that all publicly accountable entities will have to adopt International Financial Reporting Standards (IFRS) for the accounting and presentation of financial information. These standards will replace current generally accepted accounting principles (GAAP) and will take effect for wears beginning on or after January 1, 2011. Consequently, the Company will adopt IFRS on September 1, 2011 and will produce its first financial statements in IFRS in the first quarter of 2011, including comparative data. 3. Accounting policies The financial statements have been prepared in accordance with Canadian GAAP and include the following policies: Principles of consolidation The consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiary Opsens Solutions Inc. from the acquisition date. Cash and cash equivalents Cash and cash equivalents include cash and short-term investments redeemable anytime or with a maturity of three months or less beginning on the acquisition date. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined using the moving average method. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 3. Accounting policies (continued) Property, plant and equipment Property, plant and equipment and intangible assets with finite lives are recorded at their acquisition cost. Amortization is provided using the declining balance method based on their useful lives, except for patents, which are amortized using the straight-line method, at the following annual rates: Property, plant and equipment and intangible assets Office furniture and equipment Production equipment Automotive equipment Research and development equipment Research and development computer equipment Computer equipment Leasehold improvements Intangible assets with limited lives Patents Software Intangible assets with indefinite lives 20% 20% 30% 20% 30% 30% Lease term Term of underlying patent, 5 to 20 years 30% Intangible assets with indefinite lives are recorded at cost and are tested for impairment annually or more frequently if events or changes in circumstances indicate a potential impairment in value. The excess of the carrying value over the fair value is recorded in loss. Impairment of long-lived assets Long-lived assets held are reviewed annually or more frequently when events or changes in circumstances cause its carrying value to exceed the total undiscounted cash flows expected from its use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value. Government assistance and income tax credits for research and development Government grants are recorded when there is reasonable assurance that the Company has complied with and will continue to comply with all the conditions of the grant. Non-repayable grants or contributions related to operating expenses are included in the statement of loss when the related expenses are incurred. Grants related to capital expenditures are netted against the related assets when acquired. The Company is also eligible for income tax credits for scientific research and experimental development (SR&ED) awarded by the federal and provincial governments. The portion of SR&ED credits immediately receivable is accounted for in the year during which the related costs or capital expenses are incurred. The portion of SR&ED credits not immediately receivable is accounted for in the year during which these costs or expenses are incurred, provided the Company has reasonable assurance that these credits will be recovered. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 3. Accounting policies (continued) Government assistance and income tax credits for research and development (continued) Income tax credits are applied against expenses or related assets. Recorded income tax credits are based on management’s estimates of amounts expected to be recovered and are subject to an audit by the taxation authorities. Earnings (loss) per share Earnings (loss) per share is determined using the weighted average number of outstanding shares during the period. The Company uses the treasury stock method to calculate the diluting effect of share purchase options and warrants. Reconciliations of the numerators and the denominators used in the calculation of the basic and diluted earnings (loss) are disclosed in accordance with the GAAP. Stock-based compensation and other stock-based payments The Company uses the fair value method to assess the fair value of stock options or warrants as at their date of allocation. The fair value is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with an offset to the corresponding shareholder’s equity account. When stock options or warrants are exercised, the corresponding account and the proceeds received by the Company are credited to share capital. Income taxes The Company accounts for income taxes using the tax liability method. Under this method, future income tax assets and liabilities are recognized for deductible or taxable temporary differences between the carrying value and the tax value of the assets and liabilities based on the enacted or substantially enacted tax rates expected to apply to the year in which the differences are expected to reverse. The Company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all the future income tax assets will not be realized. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the balance sheet date while non-monetary items are translated at the historical rate. Revenues and expenses denominated in foreign currencies are recorded at the average rate of exchange prevailing during the period, except for depreciation and amortization, which is translated at the historical rate. Foreign exchange gains or losses are included in expenses for the year. Goodwill Goodwill representing the excess of purchase price over fair value of the net identifiable assets of acquired businesses is tested for impairment annually or more frequently when an event or circumstance occurs that indicates that goodwill might be impaired. When the carrying amount exceeds the fair value, an impairment loss is recognized in the statement of earnings in an amount equal to the excess. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 3. Accounting policies (continued) Revenue recognition and work in progress Opsens Inc. reportable segment revenues related to the sale of products are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. Opsens Solutions Inc. reportable segment revenues related to the sale or products and sensor installation services are recognized when persuasive evidence of an arrangement exists, on site installation has occurred, the price to the buyer is fixed or determinable and collection is reasonably assured. For contract revenues earned over a long period, revenues are recorded using the percentage of completion method. Therefore, these revenues are recognized proportionately with the degree of completion of the work. The Company uses the efforts expended method to calculate the degree of completion of work based on the number of hours incurred as at the balance sheet date compared to the estimated total number of hours. Work in progress is valued by taking into consideration the number of hours worked but not yet invoiced and the payments received. Losses are recorded as soon as they become apparent. Financial instruments Cash and cash equivalents are classified as financial instruments “held for trading.” As such, these financial instruments are recorded at their fair values. Changes in the fair value of held for trading instruments are recorded as investment income and disclosed as financial expenses in the income statement. Accounts receivable, balance of purchase price and income tax credits receivable are classified as loans and receivables. They are recorded at cost, which at initial recognition corresponds to fair value. Subsequent revaluations of accounts receivable are recorded at amortized cost, which generally corresponds to the initially recognized amount less any allowance for doubtful accounts. The Company has chosen to classify its financial liabilities (accounts payable, accrued liabilities, and long-term debt) as other liabilities. Financial liabilities are initially measured at cost, and subsequent revaluations are recorded at amortized cost using the effective interest rate method. Transaction fees related to “other liabilities” are capitalized and presented against long-term debt. They are amortized using the effective interest rate and are recorded in the income statement. Use of estimates The presentation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The main accounting estimates relate to the income tax credits receivable, the provision for warranty and the assumptions used in the determination of the fair value of the stock options and warrants. Actual results could differ from those estimates. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 4. Financial instruments Cash equivalents and temporary investments The Company is exposed to various types of risks in the management of its cash and cash equivalents, including those related to the use of financial instruments. To manage these risks, controls were put in place, particularly those related to investment policy. The investment policy is approved by the board of directors. The Company’s investment policy aims primarily to protect capital, while considering return on investment and income taxes. Market risk Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in the parameters underlying their measurement, particularly interest rates and market prices. Interest rate risk Interest rate risk exists when interest rate fluctuations modify the cash flows of the Company’s investments. The Company owns investments with fixed interest rates. As of August 31, 2011, the Company was holding more than 78.4% (81.4% as August 31, 2010) of its cash equivalents in all time redeemable term-deposit. Financial charges (income) Interest and bank charges Interest on long-term debt Loss (gain) on foreign currency translation Interest income Credit risk 2011 $ 22,107 18,187 100,880 (230,045 ) (88,871 ) 2010 $ 20,033 23,457 (14,200) (70,129) (40,839) The use of financial instruments can create a credit risk that is the risk of financial loss resulting from a counterparty’s inability or refusal to fully discharge its contractual obligations. The Company’s credit risk management policies include the authorization to carry out investment transactions with recognized financial institutions, with credit ratings of at least A and higher, in either bonds, money market funds or guaranteed investment certificates. Consequently, the Company manages credit risk by complying with established investment policies. Concentration risk Concentration risk exists when investments are made with multiple entities that share similar characteristics or when a large investment is made with a single entity. As of August 31, 2011, the Company was holding more than 78.4% (81.4% as at August 31, 2010) of its cash equivalents portfolio in all-time redeemable term deposit with the same financial institution. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 4. Financial instruments (continued) Operational credit risk The Company provides credit for a conventional period of 30 days to its customers in the normal course of business. Credit evaluations are performed on an ongoing basis of all its accounts receivable and an allowance for doubtful accounts is recorded when those accounts are deemed uncollectible. Two major customers represent 69.7% of the Company’s accounts receivable as at August 31, 2011 (66.1% as at August 31, 2010). As at August 31, 2011, 10.8% (23.8% as at August 31, 2010) of the accounts receivable were of more than 90 days whereas 55.8% (61.5% as at August 31, 2010) of those were with less than 30 days. The maximum exposure to the risk of credit for receivable corresponded to their book value. On August 31, 2011, the bad debt provision was established at $3,082 ($6,110 on August 31, 2010). Management considers that substantially all receivables are fully collectible as most of our customers are large corporations with good credit standing and no history of default. Interest rate and cash flow risk The Company is exposed to interest rate fluctuations on certain long-term debt that bears interest at variable rates. The Company does not actively manage this risk. Assuming the cash equivalents and long-term debt as reported on August 31, 2011 had been the same throughout the period, a hypothetical 1% interest rate increase would have had an unfavourable impact of $589 on the net loss for the year ended August 31, 2011 and $1,029 on the net profit for the year ended August 31, 2010. The net loss (net profit in 2010) would have had an equal but opposite effect for a hypothetical 1% interest rate decrease. Foreign exchange risk The Company realizes certain sales and purchases and certain supplies and professional services in US dollars. Therefore, it is exposed to foreign currency fluctuations. The Company does not actively manage this risk. For the years ended August 31, 2011 and 2010, if the Canadian dollar had strengthened 10% against the US dollar with all other variables held constant, net loss would have been $6,000 higher (net income would have been $142,000 lower in 2010). Conversely, if the Canadian dollar had weakened 10% against the US dollar with all other variables held constant, net loss would have been $6,000 lower (net income would have been $142,000 higher in 2010) for the same periods. As at August 31, 2011, the risk to which the Company was exposed is established as follows: Cash (US$237,074) Accounts receivable (US$120,686) Balance of purchase price to be received (US$433,422) Accounts payable and accrued liabilities (US$49,156) Total 2011 $ 232,191 118,200 424,493 (48,217 ) 726,667 2010 $ 509,164 501,350 826,037 (93,826) 1,742,725 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 4. Financial instruments (continued) Liquidity risk Liquidity risk represents the possibility of the Company not being able to raise the funds needed to meet financial commitments at the appropriate time and under reasonable conditions. The Company manages this risk by maintaining permanent and sufficient liquidity to meet current and future financial obligations, under both normal and exceptional circumstances. The funding strategies used to manage this risk include turning to capital markets to carry out issues of equity and debt securities. The following are the contractual maturities of the financial liabilities, principal and interest (assuming current interest rates), as at August 31, 2011: 0 to 12 1 year to 2 years to More than Total months 2 years 5 years 5 years $ $ $ $ $ 1,045,840 1,045,840 108,277 32,184 89,605 15,434 - 18,672 10,047 449,696 185,479 186,446 1,635,997 1,336,358 215,165 - - 6,703 77,771 84,474 - - - - - Accounts payable and accrued liabilities Long-term debt Obligation under capital lease Commitments Total Fair value The fair value of accounts receivable, income tax credits receivable, balance of purchase price receivable and accounts payable and accrued liabilities approximates their carrying value due to their short-term maturities. The fair value of long-term debt is based on the discounted value of future cash flows under the current financial arrangements at the interest rate the Company expects to currently negotiate for loans with similar terms and conditions and maturity dates. The fair value of long-term debt approximates its carrying value due to the current market rates. 5. Capital management The Company uses its capital to finance marketing expenses, research and development activities, administrative and working capital and capital assets. Historically, the Company has financed activities through rounds of public and private financing, debt financing as well as government grants. The Company quarterly reviews net loss and earnings before interest, taxes, depreciation, amortization and stock option-based compensation (EBITDAO). The EBITDAO has no normalized sense prescribed by the GAAP. It is not very probable that this measure is comparable with measures of the same type presented by other issuers. The EBITDAO is defined by the Company as the cash flows from operating activities without taking in consideration non-cash expenses and changes in non-cash operating working capital items. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 5. Capital management (continued) Net earnings (loss) Financial income Amortization of property, plant and equipment Amortization of intangible assets Stock option-based compensation EBITDAO 2011 $ (2,511,353 ) (88,871 ) 199,564 26,943 185,201 2010 $ 593,372 (40,839) 178,754 31,866 282,057 (2,188,516 ) 1,045,210 The Company targets to improve these ratios which negatively vary for the year ended August 31, 2011 compare to the same period in 2010. The Company believes that its current liquid assets are sufficient to finance its activities on the short-term. The Company has an authorized line of credit which is described at Note 12. 6. Gain on disposal On August 16, 2010, Opsens reached agreement to license through an Intellectual Property and Assignment Agreement (the “Agreement”) its technology in the high-power transformers business to a subsidiary of LumaSense Technologies Inc., of Santa Clara, California (United States). The Agreement gives LumaSense exclusive rights to use Opsens’ technology in the transformer business. LumaSense will have also access to Opsens’ existing distribution channels for its transformer business. LumaSense has paid Opsens US$2.2 million in cash upon closing and will pay a further US$500,000 in one year and US$500,000 two years after closing. The Agreement was recorded as a disposal. Gain on disposal calculation had been calculated as following: Proceeds Cash received at closing Balance of purchase price to be received as of August 16, 2011 (nominal value of US$500,000)** Balance of purchase price to be received as of August 16, 2012 (nominal value of US$500,000) Disposal fees Inventory and purchases credit Other expenses and accrued expenses Deferred revenues – manufacturing agreement* Gain on disposal * Opsens engaged in a manufacturing agreement with terms and conditions that are beneficial to LumaSense. ** Amount received as at August 31, 2011. Amount $ 2,190,720 443,360 376,856 3,010,936 150,000 265,829 220,000 635,829 2,375,107 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 7. Accounts receivable Trade Allowance for doubtful accounts Taxes receivable Contributions receivable 8. Inventories Raw materials Finished goods 9. Property, plant and equipment Office furniture and equipment Leased office furniture and equipment Production equipment Leased automative equipment Research and development equipment, 2011 $ 2010 $ 542,993 1,938,099 (3,082 ) 45,263 - (6,110) 28,901 95,033 585,174 2,055,923 2011 $ 2010 $ 753,826 1,016,783 669,149 759,290 1,770,609 1,428,439 2011 Accumulated Net book Cost amortization $ $ 89,320 8,326 405,208 59,028 50,988 6,757 96,742 35,476 value $ 38,332 1,569 308,466 23,552 net of income tax credits of $23,834 828,610 492,590 336,020 Research and development computer equipment, net of income tax credits of $3,078 Computer equipment Leasehold improvements 30,599 180,691 92,180 1,693,962 23,295 112,213 33,920 851,981 7,304 68,478 58,260 841,981 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 9. Property, plant and equipment (continued) Office furniture and equipment Leased office furniture and equipment Production equipment Leased automative equipment Research and development equipment, net of income tax credits of $23,834 Research and development computer equipment, net of income tax credits of $3,078 Computer equipment Leased computer equipment Leasehold improvements 10. Intangible assets Indefinite lives Trademarks Limited lives Patents Softwares, net of income tax credits of $1,518 Indefinite lives Trademarks Limited lives Patents Softwares, net of income tax credits of $1,518 Cost $ 85,114 8,326 173,383 59,028 Accumulated amortization $ 41,971 6,365 51,864 25,382 2010 Net book value $ 43,143 1,961 121,519 33,646 761,751 399,671 362,080 27,122 138,836 29,009 39,908 1,322,477 21,176 70,213 14,796 20,980 652,418 Cost $ Accumulated amortization $ 5,946 68,623 14,213 18,928 670,059 2011 Net book value $ 200 - 200 327,630 49,795 377,625 83,431 38,772 122,203 Cost $ Accumulated amortization $ 244,199 11,023 255,422 2010 Net book value $ 200 - 200 223,485 46,751 270,436 60,921 34,339 95,260 162,564 12,412 175,176 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 11. Balance of purchase price to be received Balance of purchase price to be received of US$1,000,000 payable in two amounts of US$500,000 at the end of each next two years following agreement signature, actualized at an implicit annual rate of 15% Imputed interests (at 15% rate) Balance receivable – short-term Balance receivable – long-term 12. Authorized line of credit 2011 $ 2010 $ 353,808 70,686 424,494 424,494 - 820,216 5,821 826,037 428,024 398,013 The Company has an authorized line of credit for a maximum amount of $200,000, $50,000 of which is available at all times and which does not take into consideration the margining. When using the line of credit in an amount varying from $50,000 and $100,000, the available credit is limited to an amount that is equal to 75% of Canadian accounts receivable and 65% of foreign accounts receivable plus 50% of inventories of raw materials and finished goods. If the amount used exceeds $100,000, the credit available is limited to an amount equal to 75% of Canadian accounts receivable and 90% of ensured foreign accounts receivable plus 50% of inventories of raw materials and finished goods. This line of credit bears interest at the financial institution’s prime rate plus 2% and is repayable on a weekly basis by $5,000 tranches. It is secured by a first-rank movable hypothec for an amount of $750,000 on the universality of receivables and inventories. Under the terms and conditions of the credit agreement, the Company is subject to certain covenants with respect to maintaining minimum financial ratios (see Note 5). The Company respects these financial ratios as at August 31, 2011, but the credit line was not used at the end of the period. The Company also has credit cards for a maximum amount of $75,000 to finance its current operations. The balance used on these credit cards bears interest at the financial institution’s prime rate plus 4%. 13. Accounts payable and accrued liabilities Suppliers Provision for warranty (Note 19) Disposal expenses payable (Note 6) 2011 $ 2010 $ 942,046 734,560 74,732 29,062 31,860 635,829 1,045,840 1,402,249 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 14. Long-term debt Contributions repayable to Canada Economic Development, without interest, repayable in five equal and consecutive annual instalments effective of $39,567 and $20,000, maturing in February 2012 and June 2013 Debt balance Imputed interest BDC loan, of an authorized amount of $285,000, bearing interest at the Bank’s prime rate plus 2.5%, repayable in monthly principal instalments of $3,690 and a final payment of $870 in January 2012, secured by a first-rank movable hypothec in the amount of $285,000 on the universality of the Company’s present and future, tangible and intangible property, subordinated only with respect to trade accounts receivable and inventories provided as security for the operating loans or operating lines of credits, and for which the BDC granted a subordinate clause in favour of Investissement Québec for an amount of $255,750 on the intellectual property, and by joint and several suretyship of certain shareholders for an amount equal to 25% of the outstanding commitment Canada Small Business Financing Act loan, for an authorized amount of $119,340, bearing interest at the financial institution’s prime rate plus 2.75% annually, repayable in monthly principal instalments of $1,423 until December 2011, secured by a first-rank movable hypothec in the amount of $119,340 on specific property Capital lease, bearing interest at 13,5%, payable in monthly instalments of $1,367, including interest and a final payment of $1,417, maturing in December 2010 Capital lease, bearing interest at 10.6%, payable in monthly instalments of $98, including interest and a final payment of $486 maturing in March 2010 Amounts carried forward 2011 $ 2010 $ 79,562 (10,044 ) 69,518 139,129 (23,448) 115,681 15,630 59,910 7,937 31,749 - - 4,513 1,043 93,085 212,896 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 14. Long-term debt (continued) 2011 $ 2010 $ Amounts carried forward 93,085 212,896 Capital lease, bearing interest at 13.5%, payable in monthly instalments of $140, including interest and a final payment of $740 maturing in August 2012 2,318 3,575 Capital lease, bearing interest at 9.7%, payable in monthly instalments of $837, including interest and a final payment of $837 maturing in April 2014 23,542 30,925 Capital lease, bearing interest at 13.5%, payable in monthly instalments of $375, including interest and a final payment of $1,650 maturing in August 2012 Current portion Principal payments required over the next five years are as follows: Obligations – Capital lease Total payments $ 15,434 10,047 6,703 - Imputed interest $ 2,190 1,099 237 - Principal payments $ 13,244 8,948 6,466 - 2012 2013 2014 2015 2,797 121,742 91,355 30,387 6,847 254,243 125,001 129,242 Debt and principal portion of capital lease Other debts $ $ 78,111 14,973 - - 91,355 23,921 6,466 121,742 Under the terms and conditions of the agreement on long-term debt with its financial institution, the Company is subject to certain covenants with respect to maintaining minimum financial ratios (see Note 5). Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 15. Share capital, stock options and warrants a) Share capital Authorized, unlimited number Common shares, voting and participating without par value Year ended August 31, 2011 Outstanding shares and the changes occurred during the year are as follows: Issued and fully paid Balance at beginning of year Balance as at August 31, 2011 Year ended August 31, 2010 Number Amount $ 47,865,983 15,201,618 47,865,983 15,201,618 Outstanding shares and the changes occurred during the year are as follows: Issued and fully paid Number Amount $ Balance at beginning of year Share issuance – Warrants exercised (Note 15a)i) Share issuance – Stock options exercised (Note 15a)ii) 43,398,344 12,035,259 178,889 1,250 206,580 1,404 Share issuance – Private placement (Note 15a)iii) 4,287,500 2,958,375 Balance as at August 31, 2010 47,865,983 15,201,618 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 15. Share capital, stock options and warrants (continued) a) Share capital (continued) Year ended August 31, 2010 (continued) i) Warrants exercised During the year ended August 31, 2010, 178,889 warrants entitling their holders to acquire one common share of the Company at a price of $0.80 per share were exercised for a total amount of $143,111. The book value of the exercised warrants was transferred to share capital for an amount of $63,469. ii) Stock options exercised During the year ended August 31, 2010, 1,250 stock options entitling their holders to acquire one common share of the Company at a price of $0.87 per share were exercised for a total amount of $1,088. The book value of the exercised warrants was transferred to share capital for an amount of $316. iii) Private placement On February 12, 2010, the Company realized a private placement of 4,287,500 units at a price of $0.85 per unit for gross proceeds of $3,644,375. Each unit is comprised of one common share and one-half common share purchase warrant of the Company. Each warrant will entitle the holder to purchase one common share of the Company at a price of $1.15 for a period of 24 months following the closing of the offering. Opsens paid to the agents a cash commission equal to $254,404 and issue broker compensation warrants entitling the agents to purchase 299,299 common shares of Opsens. The broker warrants shall be issuable at an exercise price per common share equal to the offering price for a period of 24 months from the closing of the offering. b) Stock options The Shareholders approved the stock option plan on January 19, 2011. The number of common shares reserved by the board of directors for options granted under the plan shall not exceed 10% of the issued and outstanding common shares of the Company. The plan is available to the Company’s directors, consultants, officers and employees. The stock option plan stipulates that the terms of the options and the option price shall be fixed by the directors subject to the price restrictions and other requirements imposed by TSX Venture Exchange. The exercise period cannot exceed five years, beginning on the grant date. These options generally vest over a four-year period, except for 1,080,000 outstanding options granted which are completely vested at grant. The compensation expense in regards to the stock option plan for the year ended August 31, 2011 is $185,201 ($282,057 for the year ended August 31, 2010). Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 15. Share capital, stock options and warrants (continued) b) Stock options (continued) The fair value of these options was determined using the Black-Scholes option pricing model with the following assumptions: Risk-free interest rate Expected volatility Expected dividend yield on shares Duration Between 1.79% and 2.31% Between 79% and 88% - % 5 years Fair value per option at the grant date Between $0.22 and $0.80 The Black-Scholes options valuation model was developed to estimate the fair value of traded options, which have no vesting restrictions and are fully transferable, a practice which differs significantly from the Company’s stock option awards. In addition, option valuation models require the input of highly-subjective assumptions including the expected stock price volatility. Any changes in the subjective input assumptions can affect the fair value estimate. The situation of the outstanding stock option plan and the changes that took place during the years ended August 31, 2011 and 2010 are as follows: 2011 2010 Weighted average Number of exercise Number of options 4,140,500 453,000 (416,500) - 4,177,000 price $ 0.54 0.36 0.68 - 0.51 options 2,788,000 1,359,750 (6,000 ) (1,250 ) 4,140,500 Weighted average exercise price $ 0.61 0.40 0.68 0.87 0.54 Outstanding at beginning of year Options granted Options cancelled Options exercised Outstanding at end of the year Options exercisable at end of the year 2,812,563 0.54 2,047,063 0.59 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 15. Share capital, stock options and warrants (continued) b) Stock options (continued) The table below provides information on the outstanding stock options as at August 31, 2011: Exercise price Number of outstanding stock options Number of exercisable stock options Weighted average residual duration (years) $ 0.35 0.36 0.37 0.38 0.40 0.42 0.45 0.50 0.60 0.64 0.72 0.80 0.87 1.15 298,000 204,000 240,000 1,150,000 90,000 50,000 50,000 1,060,000 50,000 50,000 500,000 150,000 245,000 40,000 80,000 111,938 149,375 500,000 45,000 25,000 50,000 1,055,000 25,000 25,000 375,000 137,500 193,750 40,000 c) Warrants 4,177,000 2,812,563 The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: 4.85 2.86 2.35 4.02 2.27 2.39 0.26 0.11 2.83 2.79 1.28 0.91 1.49 1.12 2.19 Exercisable price Risk-free interest rates Expected volatility Expected dividend yield on shares Duration Fair value by warrant Units issued Broker compensation warrant $1.15 1.14% 86% -% 2 years $0.32 $0.85 1.14% 86% -% 2 years $0.39 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 15. Share capital, stock options and warrants (continued) c) Warrants (continued) The situation of the outstanding warrants and the changes that took place during the years ended August 31, 2011 and 2010 are as follows: 2011 2010 Number of warrants Weighted average exercise price $ Number of warrants Outstanding at beginning of year Warrants issued, private placement (Note 15 c)iii) Warrants expired Warrants exercised during the year (Note 15 c)i) Outstanding at end of year 2,647,216 1.07 2,889,509 - (204,167) - 2,443,049 - 0.60 - 1.11 2,443,049 (2,506,453 ) (178,889 ) 2,647,216 Weighted average exercise price $ 1.03 1.11 1.08 0.80 1.07 Warrants exercisable at end of year 2,443,049 1.11 2,647,216 1.07 The table below provides information on the outstanding warrants as at August 31, 2011: Number of outstanding warrants Number of exercisable warrants Weighted average residual duration (years) 299,299 2,143,750 2,443,049 299,299 2,143,750 2,443,049 0.45 0.45 0.45 Exercise price $ 0.85 1.15 i) Warrants expired During the year ended August 31, 2011, 204,167 warrants entitling its holder to acquire one common share of the Company at a price of $0.60 per share expired. During the year ended August 31, 2010, 150,890 and 2,355,563 warrants entitling its holder to acquire one common share of the Company at a price of $0.80 and $1.10 per share respectively expired. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 16. Earnings (loss) per share The table below presents a reconciliation between the basic net profit and the diluted net profit per share: 2011 $ 2010 $ (2,511,353 ) 593,372 (2,511,353 ) 593,372 Numerator Net earnings (loss) Amount available for calculating the earnings (loss) per share Denominator Number of shares Weighted average number of shares outstanding 47,865,983 47,865,983 Dilutive effect of stock options and warrants - 2,924 Weighted average number of shares outstanding on diluted basis 47,865,983 47,868,907 Amount per share Net earnings (loss) per share Basic Diluted (0.05 ) (0.05 ) 0.01 0.01 The calculation of dilution effects excludes options and warrants that have an anti-diluting effect. However, should the Company’s basic earnings per share have been positive for the year 2011, some options and warrants, at an exercise price of $0.36 and $0.37 would have been dilutive and would have resulted in the addition of 6,357 shares to the weighted average number of shares outstanding used in the diluted earnings per share calculation for year ended August 31, 2011. In 2010, should the Company’s basic earnings per share have been positive for the first three quarters, some options and warrants, at an exercise price of $0.37, $0.40, $0.42, $0.45, $0.50, $0.60, $0.64, $0.72, $0.80, $0.85 and $0.87 would have been dilutive and would have resulted in the addition of 602,246 shares to the weighted average number of shares outstanding used in the diluted earnings per share calculation. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 17. Additional information on the statements of cash flows Changes in non-cash operating working capital items Accounts receivable Income tax credits receivable Inventories Work in progress Prepaid expenses Accounts payable and accrued liabilities Cash and cash equivalents Cash Short-term investments Other information Interests paid Non-cash transactions 2011 $ 2010 $ 1,470,749 (1,482,613) (117,067 ) (342,170 ) 40,000 13,694 62,544 (303,179) (40,000) (64,140) (356,409 ) 247,638 708,797 (1,579,750) 808,085 997,072 2,939,235 4,350,729 3,747,320 5,347,801 8,228 26,008 On February 12, 2010, Opsens issued broker compensation warrants entitling the agents to purchase 299,299 common shares of Opsens at an exercise price of $0.85 per share for a book value of $116,727. For the year ending August 31, 2010, there is also a licence disposal balance of purchase price to be received of $820,216 and disposal fees payable of $635,828 which have no impact on cash flows (Note 6). Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 18. Commitments Lease The Company leases offices in Québec under an operating lease expiring on January 31, 2014. This agreement is renewable for an additional five-year period. Future rent, without considering the escalation clause, will amount to $354,631. Opsens Solutions Inc. rents four vehicles under operating lease expiring in September 2013, October 2013 and May 2014. Future rent payments will amount to $84,565. Future payments for the leases and other commitments, totalizing $449,696, required in each of the next five years are as follows: 2012 2013 2014 2015 2016 Licence $ 185,479 186,446 77,771 - - Under an exclusive licence with a third party, the Company is committed to provide exclusive distribution of some of its products for a defined territory. 19. Contractual guarantees During the normal course of business, the Company replaces defective parts under warranties offered at the sale of the products. The term of the warranties is generally 12 months. During the year ended August 31, 2011, the Company recognized an expense for $59,872 ($4,539 for the year ended August 31, 2010) for guarantees. A provision for $74,732 was recorded for guarantees as of August 31, 2011 ($31,860 as at August 31, 2010). This provision estimate is based on past experience and is presented in liabilities under “Accounts payable and accrued liabilities”. The actual costs that the Company may incur, as well as the moment when the parts should be replaced, can differ from the estimated amount. 20. Government assistance Industrial Research Assistance Programme (IRAP) Under an agreement reached with the National Research Council with respect to the IRAP, the Company received non-refundable contributions for an amount of $498,500 to cover some of its incurred costs to carry out a development project of medical devices sensors. For the year ended August 31, 2011, the Company recorded contributions totalling $130,686 ($345,698 for the year ended August 31, 2010) which were accounted against research and development fees. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 20. Government assistance (continued) During the year ended August 31, 2011, the Company received a cash contribution for training of $6,450 from Emploi-Québec. This amount was recorded against research and development expenses. During the year ended August 31, 2011, the Company received a cash contribution for intellectual properties expenses of $6,400 from “Ministère du Développement économique, de l’innovation et de l’Exportation’’. This amount was recorded against intangible assets. 21. Income taxes The effective income tax rate of the Company differs from the rate that would have been calculated using the combined statutory tax rate (federal and provincial). The difference is generated as follows: Income tax payable using the combined federal and provincial statutory tax rate Non-deductible expenses Asset disposal Deductible financing fees Non-taxable income tax credits Losses carried forward Income tax using effective income tax rate 2011 $ 2010 $ (719,104 ) 424,353 - (73,669 ) (132,027 ) 500,447 - 194,134 268,255 (313,494 ) (86,894) (69,018) 7,017 - As at August 31, 2011, the Company has tax losses of approximately $6,820,400 for federal purposes and $6,540,900 for provincial purposes that can be used to reduce future taxable income. These losses expire as follows: 2023 2024 2025 2027 2028 2029 2030 2031 Federal $ 483,000 42,000 400 1,780,000 691,000 1,201,000 500,000 2,123,000 Provincial $ 463,000 40,000 400 1,509,000 692,000 1,214,000 500,000 2,122,500 6,820,400 6,540,900 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 21. Income taxes (continued) The Company also has undeducted research and development expenses in the amount of $3,463,000 for federal purposes and $5,115,000 for provincial purposes that are deferred over an undetermined period. Future income tax assets related to tax losses, undeducted research and development expenses, and the difference between the undepreciated capital cost for tax purposes and the net book value of property, plant and equipment will be recorded in the financial statements once the Company concludes that these losses and tax benefits will likely be realized. 22. Income tax credits for scientific research and experimental development For tax purposes, research and development expenses are detailed as follows: Federal Provincial 2011 $ 2010 $ 1,117,301 1,117,301 1,065,717 1,069,462 These expenses have enabled the Company to become eligible for scientific research and experimental development tax credits reimbursable for the following amounts: Federal Provincial 2011 $ - 269,147 269,147 2010 $ - 152,080 152,080 These credits were recorded in research and development expenses in the statement of loss. Reimbursable scientific research income tax credits earned for the year ended August 31, 2011 have not yet been reviewed by the taxation authorities, and the amounts granted could differ from those that have been recorded. Over the years, the Company qualified to federal income tax credits for scientific research and experimental development, which were non-refundable and could be used against Part I Company tax. The accumulated credits for the year ended on August 31, 2011 are about $1,094,959 and expire on a period of 10 to 20 years beginning in 2014. Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 23. Segmented information Sector’s Information The Company’s reportable segments are strategic business units managed separately as one is focused on developing, producing, and supplying fiber optic sensors (Opsens Inc.) and the other (Opsens Solutions Inc.) is specialized in the commercialization and the installation of optical and conventional sensors for the oil and gas industry. Same accounting policies are used for both reportable segments. Operations are carried out in the normal course of operations and are measured at the exchange value. 2011 Opsens Opsens Opsens Inc. Solutions Total Opsens inc. Solutions $ $ $ $ $ 2010 Total $ 1,812,047 4,193,092 6,005,139 2,892,819 2,387,897 5,280,716 618,977 - 618,977 450,211 - 450,211 External sales Internal sales Amortization of property, plant and equipment 148,131 51,433 199,564 151,961 26,793 178,754 Amortization of intangible assets 24,282 2,661 26,943 30,146 Financial expenses (311,484) 222,613 (88,871) (45,923 ) 1,720 5,084 31,866 (40,839) Net loss before gain on disposal Gain on disposal (2,159,948 ) (351,405) (2,511,353) ) (1,317,306 (464,429 ) (1,781,735 ) - - - 2,375,107 - 2,375,107 Net earnings (loss) (2,159,948) (351,405) (2,511,353) 1,057,801 (464,429) 593,372 Acquisition of property, plant and equipment Acquisition of intangible assets Segment assets 153,401 218,085 371,486 65,023 60,366 125,389 85,724 6,137,333 21,465 2,564,032 107,189 8,701,365 29,159 8,084 37,243 8,612,521 2,903,906 11,516,427 Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 23. Segmented information (continued) Geographic segment’s information Revenue per geographic sector Canada United States Germany United Kingdom Other 2011 $ 2010 $ 4,332,673 2,601,958 1,020,566 - - 906,916 298,152 181,953 651,900 1,291,737 6,005,139 5,280,716 Revenues are attributed to the geographic sector based on the clients’ location. Capital assets, which include property, plant and equipment and intangible assets, are all located in Canada. During the year ended August 31, 2011, revenues from four clients represent individually more than 10% of the total revenues of the company, i.e. approximately 35.5% (Opsens Solutions Inc.’ reportable segment), 14.8% (Opsens Solutions Inc.’ reportable segment), 11.8% (Opsens Solutions Inc.’ reportable segment) and 10.0% (Opsens Inc.’ reportable segment). During the year ended August 31, 2010, revenues from two clients represent individually more than 10% of the total revenues of the company, i.e. approximately 28.6% (Opsens Solutions Inc.’ reportable segment) and 11.3% (Opsens Solutions Inc.’ reportable segment). 24. Related-party transactions In the normal course of its operations, the Company has entered into transactions with related parties. These transactions have been measured at the exchange amount. Professional fees to a company Controlled by a director Fees are incurred for the Company’s FFR activities. 2011 $ 50,511 50,511 2010 $ - - Opsens Inc. Notes to the consolidated financial statements August 31, 2011 and 2010 25. Additional information to the statements of earnings (loss) and comprehensive earnings (loss) Government assistance Income tax credits for research and development Interest and bank charges Interest on demand loan and long-term debt Loss (gain) on foreign currency translation Interest income 26. Contingencies 2011 $ 2010 $ (143,536 ) (326,154 ) 22,107 18,187 100,880 (230,045 ) (345,698) (222,010) 20,033 23,457 (14,200) (70,129) On March 9, 2011, Opsens stated that it would vigorously defend itself against a lawsuit filed by ACIST Medical Systems Inc., a Delaware corporation (ACIST), alleging the improper use of alleged ACIST confidential information in connection with Opsens’ EasyWire device and certain patent applications Opsens has filed, including U.S. Patent Application No. 12/725,951 and International Application No. PCT/CA2010/000396 (the “Applications”). ACIST’s lawsuit seeks unspecified monetary damages, and further seeks that Opsens assign or abandon the Applications and cease development and testing of its EasyWire device. Opsens has denied all of ACIST’s legal claims in its Answer to the lawsuit filed in the United States District Court for the District of Minnesota. Opsens maintains that ACIST’s lawsuit is entirely without merit and looks forward to proving its case in Court. 27. Subsequent event On November 14, 2011, the Board of the Company has authorized the grant of a total of 870,000 stock options, of which 100,000 are immediately exercisable. Each stock option granted entitles the holder to subscribe one common share at the latest on November 14, 2016, at a price equal to $0.23 per share. 28. Comparative financial statements Certain comparative figures have been reclassified in order to conform to the presentation adopted for the current year. corporate information HeaD office 2014 Cyrille-Duquet St., Suite 125 Quebec City QC G1N 4N6 Phone: 1 418 682-9996 Fax: 1 418 682-9939 opsens solutions 10456 176th St., Suite 201 Edmonton AB T5S 1L3 Phone: 1 780 930-1777 Fax: 1 780 930-2077 Website: www.opsens.com investor relations: For information about Opsens Inc. or to be placed on the mailing list for quarterly reports and news releases, contact Marie-Claude Poitras at the head office or marie-claude.poitras@opsens.com. auDitors Samson Bélair Deloitte & Touche Quebec, QC stock excHanGe listinG Toronto Venture Exchange Symbol: OPS Shares outstanding: 47,865,983 (as at August 31, 2011) transfer aGent & reGistrar Canadian Stock Transfer Company Inc. (CST) as administrative agent for CIBC Mellon Trust Company (CIBC Mellon) 320 Bay Street Banking Hall Toronto, ON M5H 4A6 1 800 387-0825 annual meetinG of sHareHolDers Monday, January 16, 2012 - 10:30 a.m. Alt Hotel, Quebec, Mezzanine. Governance Directors Pierre Carrier Chairman, Chief Executive Officer Claude Belleville Vice President, Medical Devices & Laboratories Gaétan Duplain Vice President Oil and Gas Steven G. Arless Director Colin H. G. Cook Director Denis M. Sirois Director officers Pierre Carrier President, Chief Executive Officer Claude Belleville Vice President, Medical Devices & Laboratories Gaétan Duplain Vice President Oil and Gas Louis Laflamme, CA Chief Financial Officer, Corporate Secretary Darren Wiltse President Opsens Solutions www.ops ens.com Medical instruMentation Fiber optic sensors are infinitely small which allows their integration in instruments of very small size. they are immune to electrical and magnetic interference encountered in hospital settings and their reliable measurements are not affected by heat or humidity. In recent years, opsens’ ultra-miniature sensors for pressure/temperature have been integrated as oeM in our partners’ medical instrumentation products. Motivated by the high performance of its miniature pressure sensor, opsens pushed its business model toward FFR products. Why FFr? • Benefits from procedure recognized • Strong market growth • 510K approval process in the united States opsens has been working for several months to develop its own medical device product. For opsens, the attractiveness of the FFR market also lays in the fact that our sensors are ideal for integration into these types of products. oil and Gas opsens offers integrated services for the management of reservoirs and in situ environments to the oil and gas market. Its near-term focus is Western Canada’s oil sands market, where a growing demand to measure pressure / temperature is identified. there is a large number of active in situ oil sands projects in Alberta, and the majority of oil and gas companies are involved. Steam assisted gravity drainage (SAGD) is the most common process for developing in situ reserves. In SAGD, recovery rates are typically between 30% and 60%. to optimize production and recovery rates, operators need data on temperature/pressure below the surface directly from the injecting and producer wells, where temperatures may reach 300 degrees Celsius. opsens’ opp-W sensors have been proven to meet that need, measuring pressure and temperature up to 300 degrees Celsius. www.opsen s.com sensors at work Medical devices Development of our first complete medical device for the measurement of FFR. oil and Gas Helping operators optimize production in the Western Canadian oil sands. laboratories and scientific r&d ensuring measurement for high-tech applications. 2014, Cyrille-Duquet St., Suite 125, Quebec City QC G1n 4n6 t• 418.682.9996 F• 418.682.9939 10456, 176th St., Suite 201, edmonton AB t5S 1l3 t• 780.930.1777 F• 780.930.2077 ww w.opsens.com 

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